Business
Helping you to get the matrimonial balance sheet right!
Where a divorce involves a business owner or manager the consequences of the financial settlement can often have serious consequences for their business partners, their shareholders and their wider family (who are often involved in the business) as well as for their immediate family. The stress and anxiety alone can affect the business owners’ ability to continue to operate the business effectively.
The temptation is to try to deal with this aspect as quickly as possible without assessing the consequences and risks for all the parties involved. A structured approach can help to effectively deal with the business assets on divorce.
We can help you appraise the risks involved in your business and assist with the instruction of a specialist accountant to undertake a comprehensive and independent review of the business. They will assist with valuations and provide professional guidance on the options available when dealing with business assets.
Detailed below are some areas in which an accountant (working with an IFA) can add real value to your divorce.
A forensic accountant can help you by:
• Assisting with arriving at the correct valuation of business assets.
• Provide information on the tax implications of disposal of assets.
• Consider how funds might be extracted from or generated by a business.
Extracting funds when one party has no involvement
In the context of the divorce it may be important to work out how to extract funds from the business. Where that party has no ongoing involvement in the business you will have two main options – fund it by lump sum or by ongoing maintenance.
To fund a lump sum settlement:
• Substantial one off dividend payment
• Company buy-back of shares, especially where a non-participating spouse has a shareholding
• Director’s loan against future earnings and dividends
As an ongoing maintenance payment:
• If a shareholder – phased transfer of shares from non-participating spouse at an agreed value or formula based on profit or net asset value
• Agreement on attachment of earnings at a specific level
• Depending on company structure and other unrelated investors, issue of redeemable preference shares paying a fixed dividend for a known period
Protecting the future of the business
This is an area in which an accountant together with an IFA can add value by assisting you in deciding the best use of business and non business assets. A decision should be made whether to:
Offset other assets against the value of the business
- Typically, the matrimonial home will provide largest value offset.
- Potentially pensions or other property.
Utilise excess assets from within the business
- The property from which the company trades – consideration of sale and leaseback arrangement?
- Typically a property owning/holding company – Transfer of excess property asset to spouse (and any tax implications).
Where both spouses work in the company
This is an area with many potential issues for the exiting party to consider:
• Compensation for loss of office.
• Pension contributions or rights.
The potential issues for the company/continuing party to consider are:
• Loss of a key member of staff, potentially with specialist knowledge or contacts.
• Ongoing involvement in the business for both parties.
Ongoing involvement in the business for both parties
Where this is the goal it is important to consider how this might be structured to protect the interests of both parties. Consideration should be given to the classes of shares to be used – Ordinary shares / Sub-divided ordinary shares with differing rights, either voting or dividend entitlement / Preference shares on a fixed term and percentage of profits (formula can be specially agreed).
Thought would need to be given to the Articles of Association and these should be amended to reflect the new shares’ rights. Other areas to consider would be:
- Management agreements.
- Contract of employment.
- Prescribed or proscribed actions.
- “Drag & Tag” rights.
- Key-person” insurance.
This is a very complicated area of divorce and it is strongly advised that where businesses are involved a competent forensic accountant is instructed to safeguard your future.
