Tamsin Caine talks to Chris Longbottom about how a couple's or individual's business is considered when couples divorce. They discuss how it will be valued, how a court might view it and the options open to couples where one or both of them have their own business.
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Chris heads the Family Law team at Clarke Willmott, Manchester following joining them as Partner in January 2018. He regularly deals with the issues that arise for an individual following the breakdown of a relationship, in relation to divorce/civil partnership dissolution, their financial affairs and their children.
Chris provides advice on complex financial cases; often involving business interests, trusts, foreign assets and pensions. He has extensive experience in a wide range of disputes involving children and also advises unmarried couples in relation to separation and cohabitation issues. He has particular experience of cases where disputes arise about inherited wealth and assets acquired pre-marriage, the value of businesses and the tracing of ‘hidden’ or overseas assets.
Chris offers a personal and tailored service to meet an individual’s specific needs, listen to their objectives and provide an excellent level of service with the warmth and respect delicate issues require, ensuring that they understand each and every step taken. Testament to this is the fact that the majority of his work is generated through recommendations by previous clients and professional contacts.
Chris is a member of Resolution. He is also a regular “go-to” expert commentator on divorce and separation matters. His comments and legal insights from a divorce perspective on the recent Ashley Madison data breach were covered in a number of national media – including primetime BBC News and Sky News.
Contact Chris.longbottom(at)clarkewillmott.com or 0345 209 1775.
Director of Financial Planning and Chartered Financial Planner Tamsin Caine has a strong background of over 15 years within the financial services profession. She began Smart Divorce following her own experience with divorce; she now advises people in the same situation as she once was, enabling them to take back control of their life and finances. Smart Divorce website is www.smartdivorce.co.uk. Contact her by email tamsin(at)smartdivorce.co.uk.
Transcript
Hello and welcome to the Smart Divorce podcast. This podcast is for you if you're thinking of separating, already separated or going through divorce. My name is Tamsin Caine, and I'm a chartered financial planner. We'll speak to some fantastic specialists who can help you to get through your divorce, hopefully amicably and start your new chapter positively. Now, over to today's guest.
Tamsin
Hello and welcome to the Smart Divorce podcast. I'm delighted to be joined today by Chris Longbottom. Hi Chris!
Chris
Hi Tamsin! Are you okay?
Tamsin
I'm good thank you! So Chris is a partner and head of the Manchester Family Team at Clarke Willmott who regularly advises on issues regarding business assets, and their protection on divorce, so we'll get cracking straight on and we're going to talk about businesses and how they're treated in divorce today. So, do you wanna start us off?
Chris
Sure, yeah! So common issues: in divorce, your business is considered an asset. This is regardless of whether or not you're a sole trader, whether the business is a limited company or you're in a partnership, the family court will take the value of your business into account when looking at dividing the family assets between the couple. Now how that overall decision, division of assets and claims works generally depends on various overarching factors like the length of your marriage, the needs of your children and yourselves and so on. But what's important to know specific to the business is, that it is treated differently than cash or investments in divorce. Because the court don't consider it a liquid asset, so extracting cash or value from the business can be difficult because, for instance, it may be tax implications of doing so. Also, if it's the case where for many people the business simply provides an income for that person, then it won't be treated by the court as an asset for division in a divorce.
Tamsin
Okay, so is that the case where the couple are both actively involved in working in the business? Or if it just belongs to one of the spouses?
Chris
Both really, it doesn't really matter. It's still an asset of the marriage between the couple. So yet you have two situations, in general, in the first situation where you've got one spouse who has the business, which then provides an income there, then provides the lifestyle for the needs for that family or you may have a situation where you have a couple who were both involved in the business, either because the spouse has a full role in that business, they've set-up the business together. Or perhaps it was for tax purposes, and their accountant has advised to join on their spouse to take advantage of being able to tax efficiently, remove moneys from the business. The value of the business is still the value of the business, and how it's treated in a divorce is generally the same, there may be differences of opinion as to the value of what that one person's contribution to the business is being, what their role is. Or perhaps then what's gonna happen in the future, which party is going to keep the business and in what way and how is the other person's interest in the business going forward? Are they going to take other assets? Are they going to continue as a separate shareholder but not have involvement in the business or are they going to step away from the business completely? There are different ways of dealing with it in divorce.
Tamsin
OK, so what happens to the business? What sort of things can the the court - if the divorce was going to court - what sort of things can the court do with businesses?
Chris
So, what usually happens is that the business is valued and then that value is generally offset normally against, were possible, against the value of the other assets of the house or or cash or investments. The court also ultimately has the power to transfer shares of the business to the other spouse, and as a last resort they can actually sell the business. The court can seek that the business be sold. That is very rare, that the court would do that, of course, because generally speaking, that business provides an income which at least one of the parties, if not both parties and their children, will benefit from.
Tamsin
Yeah, selling the business seems quite an extreme measure, doesn't it? I don't imagine most business owners are going to be a particularly keen on that as an idea. So how would...? Sorry!
Chris
No, and the court aren't either. You know, the court do understand that businesses are important and different asset. And they will do all they can to offset, but there are certain circumstances where perhaps the family home has been re-mortgaged to help help the business through a difficult time. And actually, the business is the only thing in the marriage that has value to it. And in those circumstances, it may be that either shares need to be provided to the other spouse. Or perhaps the business is ready and set up in the circumstances for it to be sold; it is the right time for that sale to go through and then both parties need to just start again from scratch.
Tamsin
Yeah, okay,
Chris
But it is the last resort.
Tamsin
Yeah, you'd certainly think so. How would you go about getting the business valued for divorce proceedings?
Chris
Yeah. So how does it actually happen? So when, the first point to make is that when parties get divorced, there is a duty on them to give full and honest disclosure of all their assets in the marriage to each other and to the court. So usually what we ask the client initially is to give an estimate of the value of their business. Usually that's done via their accountant. So we would make contact with their accountant, we'd have a meeting, we'd explain that we need to provide to the court and to the other party. Evaluation in some way or some explanation from the last set of accounts as to how we've come to a figure for the value of the business. There might be issues then with looking up that value, such as on paper, there may be value, but then what do we do to add in the complexities of each case such as there is an element of that value that was pre-marriage assets. Or there are outside influences that could affect the business going, in the future going forward, such as losing a client or Brexit, which is a common theme at the minute or currency fluctuations if you've got a business that operates across Europe, especially at the minute. So the value also might not be accepted by the other party, the other party might look at the value that you and your account put forward and go "No, I don't think that's correct, because... And, I know there's business plans. I know that there's a potential of a business coming and buying your business, and so on. So the next step then is really to look at: do we need to get a formal evaluation done. Now, it's usually done under a joint instruction by both parties, and their solicitors. What I mean by that is that a letter or an instruction will be put together to an expert valuer who is usually a forensic accountant or a business valuer, where you would put in that instruction or that letter: these are all the issues. these are all the documents to do with business, these are the positions of the parties about the business and its future and its history where he's come from. And, what we would like you to do is to take all that into account and provide us with a formal evaluation, that is then the figure that the court, we, would use for the negotiation purposes, or the court would use to look at balancing within all the other assets in a marriage. Now, that's not to say that that figure cannot be challenged or you can't ask questions. So once you have that valuation done, both parties have the opportunity of saying: "but what about .." and you would put those questions formally to the expert or you would perhaps, ask the expert to attend a court hearing and ask them in person: "Have you considered this as part of your report and your evaluation?" And at the end of that, the court needs to determine what the figure actually is.
Tamsin
Okay, it's often a concern, that I imagine then it's certainly something that's been raised to me by clients. That in some way assets, the business or generation of income can be manipulated by accountants to stop it looking as though it's worth as much as it perhaps is ..in no circumstances would the other party agree to engaging with a specialist, with a forensic accountant to get evaluation done? Have you had any situations where that's not been the case?
Chris
Yeah, absolutely. We've had situations where one party feels that the other party will look at manipulating the figures or that they have built up a director's loan accounts or something's happening in the business, which doesn't then appear within what a account would contribute a figure, value to that business for us to use as a base to negotiate on. That's the purpose of doing those questions on and even when you have an independent expert, who is independent of all parties and really it is their duty to provide evaluation to the judge, to the court to start from for a figure for the parties to then consider and make up their positions forward in their arguments and their questions. Even then, when we have an independent person, there might be issues that you think that they have missed and you might feel that they've perhaps not considered that the husband or the wife has manipulated these figures within the reports. There's still the opportunity to, although it comes at a cost, have a shadow accountant. So you would provide copies of the valuation and copies of what you believe and the issues are to another accountant and that other accountant would produce questions for you to put to the independent valuer or to the court or even in certain circumstances, you'd consider whether or not to join in another expert. That other expert can give independent evidence again but on behalf of one party, usually your party, to then say: "this is why we think that valuation is wrong. This is where we think that the figures have been manipulated."
Tamsin
Okay, so do you feel that you normally come to a point where you get a fair valuation, where whatever happens to the business in the future, it's reasonable to both parties? Or is that hard to say?
Chris
Yeah, no, I do generally think that we get to that point. Now, you know, depending on which party you work for and the evaluation is done; you either have a wife who, if the wife is the person that's not involved in the business, would say, I think things are being hidden or you would work the husband who would say, who would balk at evaluation when it comes back and said: "That's not the value of my business. I know, because I know the intricacies of my business and the sector that we operate in, that I could never sell my business for that figure." And those issues, you know? What is a realistic sale price? What is, what are the issues that affect that business in the evaluation or from the other party's side, what are the concerns I have got that these figures are being manipulated? All those should be dealt with within the exercise of instructing the expert at the outset or putting questions to the experts through the court or as a last resort, getting another expert involved. Now we've recently had matters where we've undertaken the exercise and we've added in questions like we've just touched on previously to say: "Well, we feel that on paper the value may be worth X amount, but we think a portion of that value is actually prior to the marriage taking place. And because of that, we want to take a value of that business down. Now there are two schools of thought, really with the court at the minute in terms of arguments like that and challenging business reports. And what the Court have said, and I'll mention the case, it's the case of Martin in 2008 where the court gave a guidance as to the course they would take when valuing shares in a company. And they effectively said: there are two schools of thought. The first school of thought is: we undertake a very forensic exercise to this, where all the intricacies, all the arguments are there and we pound for pound, try and pull out certain bits and pieces. Now that's very difficult. It's very costly. It takes a long time and it doesn't really fit the mould of the family court, using their overall view of all the assets. I'm looking at fairness and equality and all the issues that affect business, which is risk, illiquidity. All those need to be counted for within what we attribute as a value as well. Or the second approach the courts are trying or tend to use is more of the broad brush approach. So we would say: "Okay, the value of the business is this, and I will contribute certain factors to say it needs to be discounted by certain percentage to account for the fact that some of it was prior to marriage. So there are lots of different intricacies, but what they did on the case of Martin was to say, or the husband put forward to say: "My business is worth £160 million on divorce. However, the majority of that was built prior to marriage." The issue that the husband had in that case was that of that the money in the business was - in effect - the majority of their wealth. Now what the court said was: "Well, there are different cases, will mean that we will approach in different ways. It's very fact specific to how we deal with this, however, we're fixing a value and looking at dividing or offsetting the value of the business." What the court need to look at is risk, liquidity but overall, we need a fair balance to ensure overall fairness in this. On what they said in that case, was well, we've taken all the evidence into account. We want an equal division of the assets, we're going to give a 50/50 split of the marital assets. However, using a straight line, we think that 80% of husband's business was within the marriage and 20% of it was outside the marriage. So when they divided their assets, they called out 20% of the husband's business and he retained that. And then they divided the other assets. So what they did in that case as well, was to provide the wife with the majority of the non-business assets to try and reduce the shares and the interest the wife had in the business on an on going basis and give the husband and opportunity of saying: "Well, you have more capital and I will retain the business free of of interest from you, so that we can go forward as separately as possible."
Tamsin
In the case that that happens on, let's say, for example, something completely unexpected happened in the world, that meant that the business suddenly stopped trading as expected or has huge losses all of a sudden that weren't expected. Can the person who retains the business go back to the court for a new decision to say: "Hang on a minute. You know, I was given this on the basis that we expected this to happen and it had this value. But actually that's not been the case. And I've ended up, kind of perhaps not penniless, but with considerably less in the future."
Chris
It depends where you are in your journey on your divorce. So, at the start, when I talked about giving disclosure, I'm gonna talk about experts valuing businesses. They don't just take a snapshot as of today, they do look over the last usually 3 to 5 years. Now, if you say well, the last three years, four years, five years wouldn't give you a real indication of the journey of our business because of certain factors. So on issues that we've had, with our business, we did this five years ago of seven years ago. Then you provide as much information to the expert that you think is needed to give him a real idea of the fluctuations and the journey that that businesses has gone through. And they should take into account when deciding the value or what they do is they attribute different multiples or different weighings to different years because of the history and complexities of the issues that you provide or the detail that you provide to the expert. Now that's great if you're doing it during the proceedings because there is a duty - it is part of your disclosure and duty - to give honest account of your finances to keep them up to date. So if something happens and it is during the proceedings, yes, you can bring it forward. So I recently had a case where, during the proceedings, my client sold 3/4 of his business to an outside investor, an overseas investor. So they came and bought 3/4 of the business and retained him in the business now as an employee managing that business. So that was towards the beginning of the the proceedings. So we updated the court. We updated the other side to say, this has happened. This will now affect the value of the business. And we were considering: Do we get full evaluation through on doing naught at that stage? So we presented the information of the sale and the expert was asked: "Well, can you look at that and determine whether or not that was a sale at the right amount, as well as the value of the remaining share that the husband has retained?" And then, whilst that was going on, the husband negotiated and sold his remaining share. Now, he actually sold his remaining share as much as he sold his first 3/4 share during the proceeding. So the market had changed. The value has changed, his position had changed during that period, which was a short period so we again presented this information to the court and to the other side. What we actually said was: is there any need now to get the evaluation because the only question to ask the expert now is: "do you believe that your value would have been lower than the value that he's actually sold for?" Answer was in short, yes. So the value of his business assets became cash. it became capital and it was valued at what he negotiated it to be sold at. Now, if, where your question stems from, the person with the business is saying: "Oh hold on a minute, my business, you've valued it at the last hearing at this amount. But because this outside issue has occurred, the value of my business is now dropping and it's not me. I'm not doing it on purpose. I'm not trying to undervalue my business. And because of this litigation, because of the divorce, it's outside of my control. And I'm worried that I'm gonna get stung here because you're going to attribute too much weight to the value of my business. You know, if that person presents why, it will be taken into account. Now, if a final decision has been made in court but if something occurs which drastically affects the value of that business and how it operates and what it provides to that person, which is vastly different to what they expected and what they presented. Well, in short, the two words that many lawyers love: "it depends." And if it was something that they may not have foreseen and you think it was something that, you know was, perhaps unexpected, but possible. And then it really should have been taken into account and it would be difficult to take it back to court and say: "Well, this has happened and I'm now losing out." That risk should have been one of the issues, which many experts don't put too much weight on risk, they really should be pushed by the lawyers for the person with the business to say: you know, these issues are happening in the world. This is the risk that I'm left with and the court need to attribute a percentage discount to the value that's on paper for my business because of that risk, because I'm left with a liquid asset, and because the other person's gonna get cash and a home and perhaps a pension, depending on their age, then they are safe for assets and me being left with this business because this might happen, it should be taken into account. Now, if we're talking about a completely unforeseen issue, then perhaps there are certain circumstances that you can look to see whether or not... There was a case called Barda. We refer to it as a Barda event. And it is a very high bar of something occurring, which is so unforeseen and it drastically affects the finances in such a way that the court really should have a look at this again because they shouldn't disregard what's just happened. Now if it's something that's very close to that decision, all the better. You know, if it was coming back to court like years later would say, My business is really bottomed out because of this happening, which I didn't think would happen. It needs to be something drastic, completely unforeseen with a very high bar to look at. Whether or not anybody would have foreseen that for the court to really take that into account.. it's very rare that that would happen.
Tamsin
Okay, so if I've got my own business and I want to protect my business assets on divorce... Have you got any tips for people doing that?
Chris
Yeah, absolutely. So we work with our commercial and private client teams. Very closely with our commercial clients to consider potential claims for, you know, three things that affect people. The worst in business is the worst: it's death, tax and divorce unfortunately. And our private client team will deal the with the death, our commercial team will deal with all the tax issues and setting the business up but people don't really plan and think about divorce in the same way as they do commercial aspects, and the wills and their estate. So we work with our teams to say: "well, when you're preparing your shareholders' agreements and your articles and your memorandum and so on, then perhaps you want to speak to us to look at whether or not you can or whether you should be looking at divorce in this." And perhaps we can look at ring fencing the business or the shares of the business, at least to say, this is how the shares of our business should be dealt with and treated. How the business should be valued and if one of our partners gets divorced or if we want to split between us, if it's a married couple that were in business together... Touching on that one, one other good piece of advice which everyone giggles at but it really is a good piece of advice is "Don't mix your assets." Now, what I mean by that is I know that I know that lots of accountants and financial advisors will look at a couple and if one of them's in business, will say: "Well, you know, should we look at joining in your spouse for tax purposes to help on dividends and things like that." But if that - and there might not be nothing wrong with that advice - but really you need to be taking advice from a specialist family lawyer as well to say: "If we do this, what is the risk to the business ?" Now, the business claims may already exist but as soon as you start mixing assets, then it's very difficult to un-mix them and ring fence them, and the risk of the other person being left involved in the business is probably higher, which you might not want to do. So, you should really take advice and the best way - however we deal with it - whether it's at the start, whether you're a start up, whether you are considering joining your spouse on for tax purposes or whether you were just in a business, and you're worried that a divorce may come about or if it's a inter-generational business. So we work for lots of farmers who, where the farm's a business or multi generational commercial businesses. And you say: "Well, I want to protect the value of the business myself for my brother and my sister, as partners in this business because we inherited from our father. We want to protect it from our respective spouses to pass down to our respective children. The best way to do that is to clamp using pre and post -nup agreements. Now, those types of agreements between husbands and wives that set out the future claims on divorce now within a negotiated agreement, which can include the business itself. I don't want to get into too much detail because it's probably a topic for another podcast Tamsin with you, but prenups in brief aren't legally binding in the UK yet. But if they are done correctly with independent legal advice, with providing full disclosure to each other, with doing it in good time of the marriage, with at least 28 days to reflect on the terms before signing it, and, so long as it's fair and it provides the needs for the parties; there is nothing inherently wrong in those circumstances with ring fencing assets so long as those needs are met by other assets. So what I mean by that is, if you want to ring fence your business and the sense of it is to pass it down through the generations or simply to ring fence and retain it, then there's nothing wrong with that. So long as a marital agreement provides for the needs for your spouse and your children from other assets, the matrimonial home or other savings and investments or income claims that they may have or pension claims.
Tamsin
Brilliant, yeah, we'll definitely need to do a podcast on that in the future. I think that's on the next series definitely. Is there anything you've got to add on what you said today?
Chris
No, I think we've covered it all, really. In brief, I think the main points really are: Take advice early if you're looking at a retracting business assets. If unfortunately, you're that point where you are looking separating and getting divorced and you own a business take advice early about how to present that in the best way in your proceedings or in your negotiations with your spouse to consider how and when to value the business. And if you are the spouse claiming against the other spouse with the business, take that advice and not approach it with the view of, they're gonna hide assets - they may well try to - but if you get that good advice then things should be set out to give a clear, full and frank, honest disclosure from day dot that we can then use to either consider, and we are happy with a valuer to be independently valued and then you need to add realism to it. You know: do you really want a non-controlling share of your spouse's business? Or should we look at a more sensible approach where your spouse will retain the business because they're the one with the expertise there, the one with the business interest there, the one that's always run the business perhaps and what you need is really just security of income. So as long as you know that that business, that your spouse.. is safe and continues and has a value and your claims for income, you are housed and there is an offset that they are retaining the value of their business interests, you are then retaining other assets in the marriage so long as we approach it in that view, then the cost of dealing with these issues of business should be kept to a minimum. And the other issues that go along with divorce, of stress and anxiety in time and effort that you need to go into it should be kept to a minimum as well.
Tamsin
That makes total sense. Thank you so much for joining me today, Chris! That's been fantastic. If any of our listeners want to get hold of either Chris or myself, the details of how to do so will be in the show notes from today's show. Thank you very much for listening and we'll see you soon!
Tamsin
Thank you for listening to the Smart Divorce podcast. If you'd like details of our guest today or of myself so you can get in touch, please check out the programme notes. Many thanks, see you again soon!