Businesses in divorce
If you are a sole trader, you and your business are considered a single legal entity. This means that your business cannot be sold. Likewise, a sole trader’s business technically has no assets of its own. Any assets used as part of your business would belong to you personally.
You are, however, free to stop trading at any time. You can also sell any personal assets you have that you used for your business. You would simply report any income/profit to both HMRC and the family court.
If you own a limited company, you can sell all or part of your share in it. If you do so, however, you need to do so at a fair market value. This can only be determined after an independent and objective valuation. Once you have sold your share in the company, you can stay involved with it as a direct or regular employee. You can also freelance for it.
Selling vs liquidating
An alternative to selling a company is liquidating it. This essentially means that you are formally closing it rather than passing it on to somebody else.
It is entirely possible to liquidate a solvent, healthy company. In fact, there are many circumstances where this is a perfectly reasonable course of action. In the context of divorce, this could be that you and your spouse run a business together that neither of you can (or want to) manage alone. If you do not think it would be practical to find a buyer, then it will generally be sensible to liquidate the company. Likewise, if you just want to retire, liquidation might be an appropriate option.
The considerations for liquidating a company are essentially the same as for selling a company. Similarly, any profit from the sale must usually be declared to the family court.
Why it can be a bad idea to sell a business before you get divorced
There are three key reasons why it can be a bad idea to sell a business before you get divorced:
1. Business decisions are best taken when you are calm
Even the most amicable of divorces can trigger strong emotional reactions. These may not be connected to the divorce itself. They may be a response to the practical changes it causes.
Making significant decisions when in the grip of strong emotions is as unwise in business as it is in other areas of life. In particular, it can lead to you selling in haste and regretting your decisions later on.
If you wait until after the emotional dust has settled, you put yourself in a much better position to think about what you really want and need.
2. It may have implications for what you can do in future
When you sell a business, it’s vital that you clearly understand any contractual restrictions such as non-compete agreements. It’s also vital that you understand who owns any protected branding. This is particularly important if it connects to your personal identity, for example, if it uses your name.
Working out these issues can take time and a good lawyer. As previously mentioned, it is best to address them when you are feeling calm.
3. It may have implications for your children
If you have children, selling a business will deprive them of the opportunity to take it over. This need not mean as part of a direct inheritance. It could mean them taking over the work (and its income) when they and you are ready.
Why it can be a good idea to sell a business before you get divorced
With all that said, there are times when selling a business before you get divorced is exactly the right course of action. Here are the three key instances of when that is likely to be the case:
1. If you would have sold it anyway
Some family businesses are handed down through generations, but not all are. Children do not necessarily have the same interests and ambitions as their parents. If you were thinking of giving up your business anyway (eg retiring), then it can make sense to sell it before your divorce. That way you have final figures to provide to the court if they’re needed to calculate a settlement.
2. If your business is preventing you from making a clean break
One very compelling reason for selling a business before your divorce is if it’s likely to stop you from making a clean break. The most obvious reason for this is if you work with your spouse. Some former couples can work together after divorce, but many cannot.
This is, however, not the only reason. Another possibility is that having a business as an ongoing concern may prevent you from making a final settlement. A third is that it may force you to stay in a particular area when you’d like to move out of it.
In these situations, selling the business may not be the most economically advantageous move you could make. It could, however, still be worth it overall for the peace of mind and ability to make a fresh start.
3. If your business is likely to be challenging to sell
If your business is very niche, it may take time for you to find a buyer and make a full handover. It can, therefore, be sensible to get the ball rolling before your divorce. Likewise, if you get a suitable offer before your divorce, it can make sense to take it.
The importance of good legal advice
Regardless of whether you are a sole trader or you run a limited company, the decision to give up a business should not be taken lightly. What’s more, if it does turn out to be the right decision, it’s important that it’s done in the right way.
This means that it’s strongly advisable to get legal advice at an early stage. Your lawyer will talk through your options with you. They will help you make the right choice for you. They will also ensure that all the legalities are properly managed.
Ask a lawyer if you have any questions about selling a business before you get divorced.