If the value of a business you own goes up or down between the time you separate from your partner and the completion of your divorce, you should disclose this so the information can be incorporated into the financial settlement which will be reached at the conclusion of the divorce. It is important to ensure that your soon-to-be ex is fully informed of changes in the value of big assets.
Full disclosure of your financial situation is a legal requirement during divorce and if it later comes out that the value of your business increased after you separated, and you did not disclose this, it may invalidate the settlement. Conversely, if you have hit a run of bad luck in your business and the value has gone down, you will want to ensure that this too is taken into account so you will not be paying over-the-odds.
However, the significance of any such fluctuations will be limited if the overall value of the business is low, and therefore unlikely to make a meaningful difference to the overall settlement and to meeting each partner’s reasonable financial needs. In that situation, the family courts may take a greater interest in any assets acquired or businesses started during the period between separation and the start of the divorce, in order to ensure that reasonable financial provision is made for each party.
The family courts often also take into account how much effort the business owner or operator has made to keep the business afloat and increase its value or profitability during the period of separation. If such efforts can be demonstrated, and this has resulted in the value of the business increasing, this may mean that the other partner will receive a smaller share in the value of the firm since the increase in value was clearly not due to their efforts or contributions during the marriage.
Why does this matter?
When couples divorce, their assets are divided – either by mutual agreement, mediation or (occasionally) the intervention of a family court judge. This will, of course, include any businesses wholly or partly owned by one – or both – of the spouses. A revenue-generating business is a valuable asset. But it is a more complicated one than a bank account or a house because its value relies on it continuing to operate and generate profit.
During the divorce, the value of any businesses owned will be carefully assessed and a decision made regarding a fair course of action. Although exceptions are made, the starting point for divorce in England and Wales is an equal division of assets – although a clear contribution to the success of the business by a non-owner will count in their favour.
Dividing the value of a business could be done in a number of ways – for example:
- Allotting shares in the firm to the other spouse.
- Via an agreed sale.
- Using revenue from the business to support the other spouse.
- One partner buying out the other.
The particular course of action chosen will depend on the individual circumstances of each couple. The last option above is the usual approach for businesses which are jointly owned by a divorcing couple. This approach may also be appropriate on some occasions when the partners in a business are not married to each other but one is divorcing and needs to liquidate their interest in the company.
What happens after the divorce?
At the conclusion of the divorce process, when the ‘consent’ order specifying the division of assets is agreed, signed and ratified by a judge, that is usually that. The division has been agreed and it is not usually possible for either spouse to reopen a claim against the other. In order to do so, it is generally necessary to demonstrate ‘material non-disclosure’ by the other spouse – i.e. a meaningful failure to fully disclose all financial assets and information during the divorce negotiations. If, for example, a business owner had reason to believe that their company was likely to increase in value at a defined point in time – due to a buyout for example – but they did not reveal this during the divorce negotiations, that could constitute material non-disclosure and become the basis for a fresh claim in the divorce courts by their former spouse.
If you or your spouse have business interests and you would like advice on how these interests might be handled in the event of divorce, contact us today for a free consultation.