Business and split

I know there’s no hard and fast rules but I wanted to get people’s opinions on my scenario. I don’t want people to judge, but I’m not asking the following due to money grabbing, it’s more about how I stand if my wife separates/divorces me and more importantly how we all move on and everyone gets the best out of this if it happens. So my position at the moment is that I'm expecting to separate and divorce.A lot of this focuses on a business, which makes things a bit more complicated than a simple – kids, house/assets type split.So we have a house, 2 kids, house has about 500K equity in it, so a fair amount.Married in 2013. I set up in business in 2003 as a sole trader, incorporated in 2012. To begin with the business made a little bit of money while I also worked (maybe £10K to £20K a year).

In 2011 I quit my job to work on the business full-time and things started to take off (I actually lived with my wife from 2008 or so before we were married). From a business that earned 40K a year at the time, it’s now turning over 500K+ a year. Profit is about 200K a year (albeit could be higher, around £350K if we both didn’t take big salaries/pension). I’m 100% shareholder. I didn’t split the shares with my wife, as I started it before we were married. She does however work for the company as an employee - takes a decent salary and max pension.We did have 3 employees, but now just 1. The business works with just me, but in reality it needs people so money could be spent from the turnover on extra labourSo, the business has grown well since we were married, but I set it up 10 years earlier.From my perspective, if we split I’d prefer that the business continues (under myself only as I want a clean split), it grows and does well, and that my wife and kids stay in the family home and not move away due to financial pressures and inability to afford the house (£250K mortgage). I’d probably be prepared to give up the family home (500K, plus assets) in return for keeping the business (I’ve also actually paid the whole mortgage for the last 7 years and put down over 100K deposit on the house). I think at the net profit the business is generating that a court would probably accept that split, but I wanted to work out if that’s fair.

If I give up the house I'd want to be assured that my kids are going to stay there and not move away due to my ex-wife not being able to afford to keep the house. If they move then that means I can't have my kids 50%.The business has had approaches in the region of 3 million in the past, but nothing formal. My wife would probably say that it’s worth millions, but on paper it would probably be valued at a traditional 3 times net profit as filed with Companies House, so 600K or so. She would probably also argue that she plays a bigger part in the business than she does (emotional support, generating ideas, being a Mum while I worked etc). In reality the business wouldn’t survive without myself working 15 hours a day and the background and knowledge I have in the business. It’s a volatile business, so if I’m not involved in it it makes very little very quickly. My wife has taken a salary every month since we were married, so hasn't taken time off, forgone a career for herself whilst I worked etcI know courts don’t tend to split shareholdings, but my concern is that if things do go down the legal route that I could end up having to justify the value of the business (and look like i'm down playing the value) and end up basically working in the future in order to supply my ex-wife with a benefit from the business that she’s no longer involved in. I’d rather bite the bullet and give away the house, so my kids stay local and my wife stays happy with that.I don‘t want to go down the route of lawyers and courts, but I want a fair settlement that allows us all to leave feeling like no one has been outdone. I know that on my own I can generate a lot more value in the business, but I don't want my ex-wife to feel like she was outdone when the business excels in the future due to my own hard work.

I feel that at the moment if I offered the house that my wife would think I was walking away with millions in return, when in reality I’d walk away with no assets, but a job, that I could earn from, and under my own control. I guess you could say I'm an entrepreneur and that I've done well from my own hard work and innovation. But, as with all businesses, that's quite fragile, and dependent on that person pushing it forward.

I don’t want to get into a scenario whereby I formally owe my wife some sort of share of profits going forward to support the lifestyle she had while married (although I could probably accept this short term). I do however want to make the business even more successful so that if I can I can help my kids with the lives they were used to, even if in the future that meant that I foot a lot of the bill for that if I do grow the business.Just putting the feelers out there for some opinion and maybe anyone else who has gone through a similar scenario whereby a business has been involved in a split. I know most people would be joint shareholders, which makes things a bit more clear, but in my case we’re not.

Like my username - moremoneymoreproblems - I sort of wish I just had a bit of equity and a CD collection to split! That would make things easier.

Hi,

I am sure you understand that there is no single right answer.

But I can offer a couple of comments.

Due to the length of the relationship from 2008 until now, and the fact that you have 2 kids, and the levels of assets involved - the business's value (whatever that is) is likely to be considered a marital asset.

In other words you are not likely to persuade a judge or your wife's solicitor that you should get a much bigger share than her because you started the business.

The split will be driven more by fairness and needs than by any claims of stellar contribution.

Most people would feel that taking half the house each and half the business each (and half of pensions etc) could be seen as fair.

It is much harder to assess the fairness of a split where she largely gets the house and you get all or most of the business - due to the difficulty in valuing the business.

Somewhere between £600k and £3million is a wide margin.

I suspect that for you to get a deal in the shape that you want - i.e. she gets the house and you get control of the business - then you would have to offer her some portion of the business's future profits or sale.

This could be capped at a max value and possibly limited to a few years worth of payout.
But the aim would be to structure the deal so that you continue to have a strong incentive to grow the business (e.g. just as an example - you stand to gain 80% of future growth and her only 20%) and that however much it grows you wont get that situation that you yourself have recognised where she feels very resentful of your future millions.

As you yourself recognise this is more tricky that the standard case.

If you wanted to start to work on some ideas and shape up some possible deals before moving forward more formally then that is something we could help you with either as a traditional solicitor service or through our financial settlement consulting service .

Thanks for the reply. That helps me get an idea of what will be considered fair if and when the time comes to split things
In terms of the business value, I would expect that a court would ultimately value it based on current earnings and not future potential?

Although my estimates above vary greatly, I would expect that any valuation would be done on current profits (last 3 years) and a multiple of those (for example 3x or the industry average)? I can also prove in a number of ways that the business has stagnated for 3-4 years, so future potential doesn’t look great unless growth is generated through reinvestment.

With regards to future payments from the business to my ex-wife, I assume this would be only if a fair financial settlement could not be reached at the time of divorce, and not some sort of guarantee of future profits in the business

It’s difficult for myself as I’ve explained above, that without my own involvement the business does not earn, so giving away profits in the future wouldn’t be ideal as I’d be the one working 15 hours a day to generate revenues for silent, and not even shareholders, and ultimately I would be the one taking the risk in business to invest money in things that might not work, or could even cause a financial loss.

The reason I am querying that is that one option for me would be to sell the business at time of divorce and split the money. It would be less value, but I could then make a Clean Break and set up from scratch again using my skills that have driven the current business. Ultimately revenues are dependent on my skills and knowledge.

The other consideration too is that the business could go through significant reinvestment of profits in the coming years to help it survive and grow – taking on staff, buying services and assets etc. At the moment we’ve run it in a very lean way, hence the profits. If my ex was to be allowed a share of future profits then there would then be a conflict of interest – she would want to maximise her payout, and I would want to maximise the ability for the business to grow, albeit at a hit to short term profits. That reinvestment would pay back in future years, but not short term

I could actually start to do this now – spend the excess profit and reinvest into the company. It would mean the business would look a lot less profitable though, and reduce its valuation. Not to reduce its value, but to sustain the business and future proof it.

Another thing in the back of my mind is to call and end to the relationship sooner rather than later, because the more time that goes on, and the more inevitable our split becomes, the more complex it is to break up those marital assets.