Financial Settlements when your ex is Self-employed
Negotiating a financial settlement after your divorce, when your former spouse is self-employed, can be particularly complex and challenging.
The specialist Family Lawyers at OTS Solicitors provide expert financial settlement legal advice on obtaining a financial court order when your ex-spouse is self-employed.
The financial settlement challenges when your ex is self-employed
Here are some of the challenges of negotiating a financial settlement when your former spouse is self-employed:
- Establishing the value of the business.
- Finding hidden or undisclosed assets.
- Valuing complex pension schemes with commercial property linked to the business.
- Evidencing the true income from the business, especially if it is predominantly a cash-generating business.
- Unravelling the complexities of business arrangements if you are also a company director, minority shareholder, partner in a limited liability partnership or employee or a combination of these roles.
These complexities can apply whether your spouse is the managing director of a company with a multimillion-pound turnover, a sole trader, or the director of a shell company.
Valuing a business when your ex is self-employed
Some businesses may not need to be valued in financial remedy proceedings. For example, a shell company that your ex-spouse uses solely to channel income through, with their business having no premises, assets, or goodwill. In other scenarios, a business may require careful evaluation by several experts. For example, if the commercial business premises are recorded in the company accounts as a company asset but have not been formally valued for an extended period, a commercial agent may need to value them. A forensic accountant can accurately value the whole company, including goodwill. A forensic accountant may need to address fluctuations in income or substantial changes in stock as part of their enquiries and to value the business accurately.
Some spouses believe their ex’s business won't need to be valued because they do not want the court to order the sale of the business or the transfer of shares into their names. However, unless your ex-spouse’s company shareholding is accurately valued, you will not know whether, in your divorce property claim, you should be arguing for the transfer of the family home and investments into your name and payment of a lump sum or whether a more modest settlement would be a fair outcome.
Self-employed income in financial settlement negotiations and court proceedings
It is common for self-employed income to fluctuate with company performance. Fluctuating income can be a worry if you are reliant on your ex-partner for spousal maintenance or child support.
In some cases, a forensic accountant can be asked to give an opinion on the reasonable future income stream to help you reach an agreement on financial support or for the court to make a spousal maintenance order. The court is normally keen to make a clean-break order to end all financial claims between a husband and wife and achieve finality. That may not be possible if a company is income-rich but asset-poor. For example, a digital company with one employee working from home, no substantial business assets, and no significant goodwill value because it has no long-term contracts with third parties, and so no guaranteed future income stream.
An accountant may need to examine a business's bank statements, tax returns, unpaid invoices, or stock levels to form an informed view of the realistic prospects for future income.
In many small family businesses, a husband and wife may both be employed and earn income from the business. However, one of them may not be actively involved in the business. The financial settlement will likely include an agreement that they will resign from their employment and not bring a separate employment claim against the company. Family Lawyers will then need to consider the future earnings of the resigning spouse and whether spousal maintenance or an additional lump sum to compensate for the loss of ongoing spousal maintenance will be required.
Fluctuating incomes and the ongoing ability of spouses with business-derived income to manipulate their income may allow an ex to reduce child support payments or avoid paying any maintenance. That’s why it may be beneficial for a spouse exiting a family business to negotiate a clean-break order. That way, they are not reliant on their former spouse for ongoing spousal maintenance. With a larger lump-sum payment, instead of spousal maintenance, they may be able to purchase a new property with a mortgage they can afford, even if their ex does not pay child support, since they will be able to manage on their income.
Red flags and business assets
Divorce Solicitors in London with experience handling financial settlements involving business assets are trained to spot red flags that may be used to reduce the value of a business or artificially lower income streams. There are numerous red flags:
- Slowing the delivery of invoices during financial negotiations.
- Deliberately not chasing bad debt.
- Reducing the value of stock in the business accounts.
- Saying third parties have decided to terminate contracts that give the company a reliable income stream, and therefore reducing the goodwill and the income-based company valuation.
- Arranging for the business or shares to be transferred to a family member or friend at an undervalue.
- Talking up a problem, such as the threat of company litigation by a dissatisfied customer or former employee.
These are just a few of the mechanisms by which a self-employed ex-spouse can try to reduce the value of their company. Equally, a spouse who is not involved in the company may place an artificially high value on it based on historical, but unsustainable, profit margins because they are unaware of the impact of stock, employee wages, and employer NI rises on company profitability.
Talk to OTS Solicitors
The Family Lawyers at OTS Solicitors have substantial experience advising on financial settlements involving business assets or self-employed spouses.
To ensure that you obtain the comprehensive financial and legal advice you need when separating from a self-employed ex, we regularly work with:
- Forensic accountants.
- Pension actuaries.
- Tax advisors.
- Asset tracing experts.
- Specialist family law barristers.
- Business Lawyers and Employment Solicitors.
Balancing the instruction of experts and business-related financial disclosure enquiries isn’t always easy to advise on at the outset of instructions. There may be many uncertainties, such as the value of the business's stock, proving turnover in a predominantly cash business, or investigating a sudden fluctuation in income or the loss of a contract that coincides with the commencement of divorce proceedings. In other situations, a balanced view may be needed. For example, if you were married for 12 months and signed a prenuptial agreement before your marriage that included comprehensive financial disclosure of business and other assets, extensive enquiries may not result in your achieving a different financial settlement from the fair needs-based settlement you negotiated in your prenuptial agreement.
In every family where one or both spouses are self-employed, our Divorce Financial Settlement Lawyers carefully consider the extent of the family and non-family assets, the need for expert assistance and the cost-benefit of obtaining reports and asking a judge at a final hearing to make a financial court order. That’s an essential part of our role in providing the best commercial and strategic family law legal advice to help you obtain an acceptable financial settlement and financial court order.
Appointments are available at our London office, by phone, or online.
Our lawyers speak Arabic, Armenian, Farsi, French/Mauritian Creole, Spanish, Tamil, Tagalog/Ilonggo, and Urdu/Punjabi.
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