How are business assets treated on divorce?
When a couple separate all assets must be disclosed and this includes any interest either party has in a business. The business interest could be shares in a limited company, an interest in a partnership or LLP, or it may be a sole trader. It is not only the value of the interest in the business that is a consideration but also any income that is derived from that business interest that is relevant in the overall assessment of a case.
Valuing a business
It is important to place a value on a business or interest therein, but the courts approach to a business valuation must be borne in mind, which is the determination of the value is “an art not a science” and the court will therefore undertake a broad analysis as opposed to a detailed accountancy exercise. That is not to say that a formal business valuation by an expert would not greatly assist the court, as this provides a basis on which the court can determine what a fair outcome may be considering all of the facts of the case.
There are different ways in which a business can be valued and the approach that is taken depends upon the business itself and its purpose. The different approaches are an asset basis, earnings basis or based on the market value, in most cases the present market value. The approach taken in valuing a business is very much dependent upon the business itself, and the sector in which the business trades.
If a valuation is deemed as necessary and proportionate then consideration needs to be given to an appropriate expert to value the business, which would usually be a forensic accountant, ideally with knowledge of the relevant business sector. There are several factors that would need to be in contemplation when considering the value of the business, value of assets, liquidity of the business, future earnings from the business, commerciality, and the marketplace in which the business trades and the economic landscape at the time to name but a few.
Tax implications and risk factors
Inevitably an interest in a business such as shares, can be seen as laden with risk compared to other assets asset such as savings/investments, as there is a greater risk that the value of the assets may fluctuate and dependent upon the business itself the party retaining the interest may have limited if any input into the business itself. Therefore, it is not always appropriate to compare assets like for like as some assets have a greater level of certainty in the value placed upon them.
There is also tax implications to consider with a business asset and advice from a tax expert may be prudent to avoid one party suffering a loss at a later stage that has not already been contemplated.
If you require further advice on the financial matters following separation and divorce then please do not hesitate to get in touch with us.
Senior Associate – Family Law