Data published this week by the Ministry of Justice points to a sharp increase in the number of divorces over the past 12 months. Economic uncertainty is, says Philip Rutter Partner and Head of the Family & Divorce team partly responsible.
The number of divorces in England and Wales has increased to its highest level for a decade. From a historic low in 2021 (108,286), the number of divorces in 2022 increased by 11% to 119,709.
Whilst the impact of the Covid pandemic is undoubtedly responsible for the 2021 fall, the increase in 2022 will partly be due to the state of the economy and the cost-of-living crisis.
Business owners divorcing may see economic uncertainty working in their favour, with lower company valuations resulting in smaller divorce settlements, but where a business is the most valuable family asset, care and consideration will be needed.
How a business is treated will depend on many factors including its value compared against the rest of the assets, where it is in its life cycle and liquidity.
It is rare for the courts to decide a business should be sold as a result of a divorce, recognising that it is the ‘goose that lays the golden egg’. In most instances, the income generated by the business will need to be maintained. However, if the owner is close to retirement age and with no succession plan in place, the courts may decide a sale is appropriate. Where the owner is some way off retirement, a sale is unlikely to be ordered, but the court will want to investigate whether money can be released from the business to help meet any financial award, whether in a single lump sum payment or by instalments over time.
Generational family-owned businesses, particularly where children are or will be involved, may again be treated differently as there will be a desire to keep the business going for future generations.
At the heart of any decision will be the valuation of the business. An independent forensic accountant will nearly always be appointed on behalf of both parties to carry out a valuation. The accountant will consider the assets owned by the business, its earnings and profitability, cashflow and the structure of the business. They will be asked to advise on what money, if any, can be released from the business without harming it. Tax implications will always need to be considered.
Where both parties are actively involved in a business, they will need to decide if they are able to continue to work with one another. If not, the impact of one stepping aside and possibly starting a new business will have to be factored in.
The future success or not of any business is not assured and repeated court cases have shown that parties cannot revisit divorce settlements simply because a business has been more successful than anticipated or it has collapsed. The party retaining the business has to take the risks associated with it.
In cases where financially vital information has been deliberately withheld that would have had a significant impact on a valuation, which comes to light after a final order, then the courts can always revisit a divorce settlement.
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The above is accurate as at 04 April 2023. The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.