HM Insights

The business of divorce in a pandemic – what do owners do about the value of their interests?

Businesses have invariably felt the strain of the economic consequences of the pandemic. Most town centres have been adversely affected and premises have been forced to shut by Government measures and strict new rules. The forecast is bleak for many businesses with the economy predicted to shrink and tougher times likely lie ahead for many.

However there are some signs that on a more local level businesses are adapting and thriving. For example, Forres High Street has been singled out as an area of growth with six new businesses opening in the last six months. Lockdown measures have resulted in increased footfall on local high streets and greater community level investment. More people are shopping locally through necessity and this is boosting local industry. There are some signs for optimism as businesses adjust to the challenges brought about by the pandemic.

In addition to the strain felt by many businesses, the coronavirus has inevitably had significant impact in the domestic sphere. It has intensified relationship strains and exacerbated financial pressures. The pandemic has seen many relationships struggle and divorce rates soar. Amid these difficult times, a separating couple with business interests will face the added complication of how to navigate the complex scenario of valuing and dividing their business. This may be particularly fraught at a time of economic uncertainty and downturn.

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What is the likely impact for those with a family business who have reached the difficult decision to separate?

The first step in contemplating financial division on divorce is to quantify the matrimonial assets. Put simply, these are the assets which have accrued during the period of marriage. There are exceptions to this if assets are gifted or inherited.

A business owner contemplating divorce will require advice as to whether their business should in law be categorised as matrimonial property. Perhaps the business was acquired prior to marriage and can be excluded from divorce negotiations. However, specialist advice should be sought in relation to this.

Restructuring arrangements which were advantageous in terms of minimising tax liability can have calamitous implications in a subsequent domestic separation. Decisions taken to reallocate shares or income during the marriage may mean that a business can then consequently be construed as matrimonial property.

The process of valuing a business or business interests is a complex one in ordinary times. Just as the pandemic has amplified tensions in personal relationships it has also made the task of business valuation more difficult. Specialist advice is needed and an accountant can assist in determining the value of a business at the date of separation. Such a valuation will have regard to net assets, goodwill and earnings.

Predicted profitability and income is likely to have been affected by the pandemic. Different methodologies for valuation may be used and this can in itself become a disputed aspect of a separation. Businesses managed by a husband and wife in which they both have a day-to-day role can be particularly complicated in terms of quantifying value and contemplating division. It may be that one party leaving the business or transferring an interest could devalue the business itself and this will have consequences for the negotiations. The pandemic impact on the business valuation may force couples to take a longer term view of settlement options in the hope that their business can weather the storm.

What can be done to mitigate risk?

Prudent planning and specialist advice can mean that potential pitfalls are avoided. Business owners would be wise to take advice not only from a commercial solicitor but also a family law specialist. A business owned prior to a marriage can be ring-fenced or protected from any future dispute with a prenuptial agreement. Decisions taken in respect of the business, whether related to tax or structure, should be carefully considered in the context of the owner or shareholder's domestic context. Essentially, business owners should be aware of the wider implications and ensure that corporate advice is not taken in isolation of the family law.

Get in touch

To find out more about how you protect your business interests in the event of separation or divorce, please get in touch with a member of our team.

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