Divorce and the Family Business
If you run a family business with your spouse or civil-partner and you are undergoing a divorce, one of your foremost thoughts is likely to be, “What will happen to the business?”
The ending of a business relationship is always a complex consideration and here we answer some of the most frequently asked questions about divorce and the family business.
What will happen to the business on divorce?
Like many of the arrangements that will need to be negotiated on divorce, there is no one size fits all approach to dividing a business, so, it is crucial that you seek guidance from an experienced divorce solicitor as soon as possible in order to evaluate the business asset and build a plan as to how it could be divided fairly.
Depending on its structure and ownership, at least part of the family business is likely to be treated as a matrimonial asset that will need to be divided on divorce. Wherever possible, the court will work towards seeing that the business stays with the original owner, however, if the business was set up by both spouses as a partnership during the lifetime of the marriage or civil-partnership, this makes the division more complex.
Why is my business considered a marital asset?
A family business is an asset in the same way as the family home, property and savings and although it’s unlikely to be a liquid asset, it will need to be divided. Many spouses do not actually ‘work’ for the business, but if they have supported the owner as a homemaker and/or taken care of children while the owner built up and worked for the business, the company will be considered matrimonial property and both parties will have an interest in it as an asset.
Unless the divorcing parties are amicable and determined to keep working together in the business, the court is likely to seek a remedy that will keep the business stable and maintain a workable platform for the future, while ensuring fair division of the value and share of assets that creates a clean break.
How can my spouse claim part of a business that has been in my family for generations
Firstly, if the marriage or civil-partnership was very short-lived and there are no children, the court may not consider the business as part of the assets to be divided. However, a family business does, in many cases, become a matrimonial asset on marriage, even if the other party is not actively involved in running it.
Unless a pre-nuptial agreement was signed stipulating that your spouse would not seek part of the company on divorce, the financial settlement on divorce will need to attribute each party’s appropriate share of this asset.
Even with a prenup in place, the court will always seek to achieve fairness during a financial settlement and if the other spouse’s needs cannot be met from other assets in the matrimonial pot, any argument that ‘ring-fenced’ the family business is likely to fail.
Will a divorce end the business?
The court will, wherever possible, consider the future stability of the business when dividing it as a marital asset and if splitting the business would damage it, or other shareholders’ stakes, then the court may order an offsetting method, such as a larger share of other marital assets or maintenance payments to ensure financial fairness.
When there are other shareholders or business owners outside of the marriage, their stake will not be included in the financial settlement on divorce; only the financial interest of the two divorcing parties will be part of the divorce settlement.
What are the relevant factors the court will consider?
The court will need to know:
- Who owns the business?
- Who runs the business on a day-to-day basis?
- What income does the business produce for the spouses, such as salaries and dividend income?
- What the business consists of, i.e. property, capital, other assets, etc
- Does the company have a pension scheme?
- Whether it’s possible to extract capital sums from the business?
- Whether it’s possible to borrow against the business or its assets?
Who should value the business for a divorce financial settlement?
If the business is a small business with little or no assets, for example a sole trader with a single work premises providing an income for the family, it is unlikely that an independent valuation will be required.
For more complex business structures, an independent accountant should be appointed to prevent any valuation bias that could be challenged by the other party. Specialist assets, such as overseas property and complex plant or intellectual property assets, should be valued by specialist independent valuers.
An in-house accountant may assist in the independent valuation process and look over the valuation appraisal before it is submitted as part of the financial settlement on divorce, however they should not, as a rule, undertake the valuation themselves.
How will the court divide the family business on divorce?
There are a number of approaches the court can take to family business assets during a divorce financial settlement and these include:
- One party retains control of the business – the other party will be compensated, perhaps with a lump-sum payment or maintenance, or a combination of the two.
- Both parties become shareholders – the business does not need to be sold and both parties share the risk. A shareholders agreement will need to be drawn up to protect the interest of the business and all other shareholders.
- Transfer of shares – suitable in situations where only one party will continue running the business, but both parties are owners.
- Selling the business or shares – courts generally only order the sale of a business or shares in exceptional circumstances where no other remedy achieves fairness and one party is unable to “buy out” the other party. If this approach is adopted, the court should allow enough time for the sale so that a fair price can be achieved.
Divorce financial settlements to protect the family business
Our divorce solicitors and family specialists are committed to making the divorce process as clear and straightforward as possible. We aim always to encourage amicable settlements relating to the issues of relationship breakdown, and to help our clients understand the options available to them.
Talk to Wellers Law Group today about your situation and your aims, so we can discuss how we can help you through the divorce process.
Contact our office in Bromley today to arrange an appointment with a family law solicitor on 020 8464 4242. For our Surrey team call on 01372 750100, for Sevenoaks the number is 01732 457575 and for central London please call 020 7481 2422.