Going through a divorce can be a difficult and often distressing process and circumstances can become increasingly complicated when there is also a family business to consider.
The starting point
The starting point for the division of finances very much depends on the length of the marriage. For long marriages, an equal division of the available assets is the starting point whilst in shorter marriages, it is generally based on the needs of the parties. The objective upon any division of assets is always to achieve fairness which is arrived at by considering needs, sharing and compensation.
In order to decide what a fair outcome will be, both parties’ assets and liabilities are taken into account and form part of a matrimonial pot. With regard to the family business, any value that it has will also form part of the matrimonial pot. It is important to note that a business is not a liquid asset and is therefore not treated in the same way as cash or investments. Businesses generally have a capital value but their primary purpose is generally a vehicle for producing an income. How the business is treated as an asset upon a financial settlement will be case specific.
If the business was incorporated or inherited prior to the marriage, there may be an argument for some or all of the business to be ring-fenced, preventing the other spouse making a claim. In the event that the spouse’s financial needs cannot be met with a share of the assets which form the matrimonial pot, then their needs will take priority and any ring-fencing arguments are likely to fail.
In considering how the business is treated upon a financial settlement relevant factors will be: –
- Who owns the business?
- Who is responsible for the day to day running of the business?
- What income does the business produce in terms of salary for the spouse and dividend income?
- Does the business contain property or assets?
- Is there a company pension?
- Is it possible to extract capital sums from the business?
- Is it possible to borrow against the business or its assets?
What will happen to the family business on divorce?
If one spouse owns a business outright, or has a significant shareholding in a business, then it is usual practice to have the business valued. An application needs to be made for the Court’s approval of a valuation in the event that it is not agreed between the parties. In terms of valuing the business, usually a forensic accountant is tasked with dealing with this but may require the input of other experts if there are other assets to the business, for example a property. The Court will discourage multiple valuations in favour of appointing a single joint expert who is instructed by both parties to produce an independent valuation to the Court.
In circumstances in which the business has no capital value and purely generates an income, the Court may take the view that any maintenance claims may be able to be serviced from the income generated and therefore there is little point in ordering a valuation. It would be deemed entirely disproportionate.
The Court is unlikely to order a business to be sold to the detriment of the other owners in cases where the spouse is a joint shareholder.
The outcome will depend on the particular situation and each case will turn on its own facts. There is no set formula as to how a family business should be dealt with. An important consideration in most cases is that the parties will not want ongoing business ties after the divorce is finalised.
The court’s powers include the following:
- One party retains control of the business and the other party is compensated with a lump sum payment, maintenance or a combination of the two – In most cases this is what happens. If there is a prospect of maintaining the business without splitting the company assets by providing the required lump sum from other matrimonial assets, sometimes this is more palatable to both the paying and the receiving party. The courts have referred to a family business as being ‘’risk laden’’ compared to other assets such as cash and property which are “copper-bottomed” and therefore, much more certain. A drop in the value of the business can have significant consequences for one or both of the parties. From a negotiating perspective, it may therefore be more favourable to the receiving party to receive non-company assets as these are not deemed to be as risky.
- Both spouses are made shareholders – This may happen if there are insufficient assets to meet capital needs and/or the business has a substantial value. This type of settlement will prevent the business being sold and means the parties will share the risk of the business suffering a downturn between them. In this instance a comprehensive shareholder’s agreement will be required to protect both parties’ interests in the business.
- Sell the business or shares – Although the court has the power to order the sale of the business, this will usually be avoided as the income from the business often funds the family’s lifestyle. However, there will be occasions where selling the business will be essential to ensure fairness. In the rare occasion this is necessary, efforts will be made to give the business owning spouse an opportunity to “buy out” their spouse’s interest in the business. It is also not unusual for a judge to allow the business owning spouse sufficient time to find a buyer to avoid the business being sold at an under value.
- Transfer shares from one spouse to another – This may be appropriate where a family business is owned by both spouses, but only one spouse will continue to run it in the future.
What can be done to protect the family business?
There are various ways to protect the family business, for example entering into a pre or post nuptial agreement or by drafting documentation in accordance with the relevant company law statute that may assist in reflecting how the shares in the business should be held and by whom. As to the extent of protection offered by the above measures this will differ on a case by case basis.
If you would like any further information on how a family business is treated following the breakdown of a marriage and how to protect your business interests, please contact Lucinda Holliday on 01494 478 603 or at firstname.lastname@example.org.