Divorce is a difficult and emotional process that becomes even more complicated when a business is involved. If you and your former spouse have decided to go your separate ways but still have a shared business to run, there might be further challenges during your divorce.

You may be worried about what will happen to your family business and your role within it.

In this blog, I will explore the main areas to consider when divorcing your business partner and share some practical steps to navigate the challenges of shared business ownership during a divorce to allow you to make positive choices and find solutions when your marriage comes to an end.

Management, operation and control of the business during the divorce

When your marriage breaks down, it's crucial to consider the management and operation of the business during the divorce.

Here are some practical steps to help you:

Develop a plan for the business

Having a clear plan in place is essential to manage the business effectively while your divorce is ongoing. This plan should outline each partner's roles and responsibilities, how decisions will be made, and how conflicts will be resolved. It may be helpful to involve a mediator or a neutral third party to help facilitate discussions and ensure that both of you are heard and understood.

Be transparent and honest

Open communication is critical during a divorce involving a shared business. You must be honest about the company's financial health, assets, liabilities, and any challenges or obstacles that may arise. Avoid hiding information or assets from your former spouse, which can lead to legal and financial consequences.

Prioritise the needs of the business

While your personal feelings and needs may be at the forefront of your mind during a divorce, it's essential to prioritise the needs of the business. Your shared business is an important asset that must be protected and preserved, so working collaboratively is critical to ensure its success.

Make reasonable efforts to maintain the status quo of the business. This may require compromise, flexibility, and a willingness to put personal differences aside in the interest of the business. Intentionally neglecting the business will have negative consequences.

Separating couple going through divorce who are successfully running their family business

With careful planning and communication, you can ensure that your family business remains viable and successful, even in the face of personal challenges, until you decide what to do about the business after your divorce.

Income distribution from the business during the divorce

There will usually be a period between your separation and then resolving the financial aspects of your divorce.

It may or may not suit you to continue to run the business together during the divorce process. The practicalities of how to deal with this interim period will depend on the structure of your business.

You and your former spouse may have different ideas about how income should be distributed, and it's important to be prepared to negotiate and find a solution that works for both of you, either engaging in direct negotiations or through mediation. Ensure that any decisions about income distribution are made in accordance with the law and with professional guidance.

Separating couples who own businesses together sometimes attempt to create economic hardship for the other spouse during the divorce by controlling or mismanaging revenue and income. If that is the case, you must review the financial records to ensure all income is accounted for and properly distributed. This may involve hiring an accountant or financial professional to help you understand the finances and identify discrepancies or irregularities.

If you cannot maintain a good status quo, then the court may need to intervene on an interim basis and appoint a receiver who will receive and distribute the revenue that comes into the business.

Division and running of the business post-divorce

When a couple owns a business together, the financial settlement negotiations can be complex as you will need to decide on the division and running of the business after the divorce.

Here are some key considerations:

Get professional help

It's essential to have professional guidance from experts who understand both family law and business law.

You may need to work with a family lawyer with business ownership experience or seek advice from a business lawyer familiar with matrimonial proceedings.

A financial advisor or accountant can also help you determine the value of your business and its assets, as well as help you develop a financial plan for your business post-divorce.

Value of the business

If the business was set up during the marriage, it would be “matrimonial property”. It does not matter if the business is in the name of one of you only or if one of you owns a more significant share of the business than the other. If you are the only two parties involved in the business, then the whole business is “matrimonial property”.

In a divorce, the “net value” of a business should be divided fairly between the divorcing couple.

Valuing a business can be complicated, mainly if the business is privately owned. Either of you can arrange for a business valuation, but it's common for a forensic accountant to be appointed, particularly in court proceedings.

The valuer will consider various factors, including the business's assets, earnings, structure, liquidity, and tax implications.

There are also different methods for valuing a business, and the results can vary depending on the method used. The three main approaches are:

The Cost approach, which is based on the fair market value of the net assets of the business.
The Market approach, which values a business based on what similar businesses have sold for in the recent past.
The Income approach, which uses projected earnings to derive a present value for the business.

Depending on your business type, one approach may be more suitable than another.

Once you have an accurate valuation, you can negotiate how the business will be divided if you do not want to continue running it together or want a lower share.

Seeking professional advice on valuation and division of business after divorce

Choose the right option for you and your business

Dividing a business can be a complex process, and various options exist. You can sell the business and split the proceeds, continue to run the business together or have one of you buy out the other's share. Each option has advantages and disadvantages, and you will need to weigh these carefully before deciding. Consider the long-term viability of the business, your individual goals and priorities, and your financial and legal obligations.

Whatever option is chosen, success will depend on whether you can continue to work together or, indeed, want to continue to work together.

If one of you wishes to retain the business

The net value of the business and, if applicable, the net value of the shares being transferred and the tax consequences of the share transfer will have to be considered when dividing your matrimonial pot.

The income that the spouse retaining the company will receive from the business in the future, compared to the earning capacity of the leaving spouse, is also an issue that must be considered. Sometimes the earning capacity of the spouse leaving the business will be considerably less than the salary and dividends they received from the business. Again, this must be factored into the financial settlement upon divorce.

When you decide to continue running the business together

This is often the case where you both have equally important roles in the business, and taking either of you out of the business would damage it. It also happens when you have the plan to build the business up with a view to selling it in the future. This obviously works well where you are still on good terms.

It is essential to have a comprehensive agreement when you divorce, if you did not already have one, outlining your responsibilities, rights, and obligations and ensuring that any disagreements regarding the business in the future are dealt with fairly.

If you decide to sell the business

The funds raised will be divided between you per your share of the net value.

Business partners going through divorce closing and selling business

If you cannot reach an agreement with your former spouse and need to go to court, the court will consider all the facts related to the business when making a decision. This includes who owns the business, who works in it, the income it generates for each of you, whether significant assets could be sold, and whether your pensions depend on the business. Ultimately, the court will strive to reach a fair outcome for both of you.

By seeking professional guidance, considering all options, and prioritising the business's needs, you can work together with your former spouse to ensure the continued success of your business. Communicating openly, being transparent and honest, and being prepared to negotiate and compromise is essential. With careful planning and a willingness to work collaboratively, you can successfully navigate the complexities of divorce and shared business ownership. The end of the marriage need not mean the end of a business.

I’m Julia Moreno, a family law solicitor and divorce coach guiding individuals and couples through the legal and emotional turmoil of divorce towards a new and happy life. You can join my mailing list for free nuggets of inspiration, motivation and education for your separation and divorce journey or book a free clarity call with me. You can also contact me at julia@juliamoreno.co.uk.

Untangling love and business. Navigating divorce when you own a business together.