Divorce and the Family Business

Family business

Historically there was an assumption that a family business would be protected on divorce. However, this is no longer the case.

Now, a business owned by one or both of a divorcing couple forms part of the assets to be divided. As such it will usually need to be valued before settlement negotiations can commence and, if financial remedy proceedings are instigated, the valuation of business interests is routinely required as part of the financial disclosure process.

How the business will ultimately be dealt with will depend upon the nature of the business. Important considerations are:

• whether both of you are involved;
• whether the business owner is a sole trader, a partner or director of a limited company;
• whether one or both of you hold all the shares or a percentage of the shares;
• whether the business is shared with other family members or with people with competing interests outside the family;
• whether the business owns property or assets;
• whether capital sums can be extracted from or borrowed against it;
• whether it is merely an income-producing vehicle.

Importance of early legal advice

If you are a business owner you should take specialist legal advice from a family lawyer as to your options for protecting your business. It is important not to panic and make changes to the business as this may damage your position, particularly if the changes are obviously designed to obstruct divorce settlement negotiations. However, there may be sensible steps that can be taken to minimise the risk to you on divorce.

If you are not the business owner, you will need to consider how best to claim a fair share without damaging the continuity of the business. You will also want to make sure that the business is not being put at risk, perhaps as a result of increased borrowings or because arrangements are being made to limit your claims. If this is the case, you should get immediate specialist legal advice from a family lawyer as you may need to apply to the Family Court for a freezing order or for arrangements that have taken place to be set aside.

Approach of the Family Court

If it is possible, the Family Court will usually leave the business owner with the business and compensate the other spouse with a larger share of the other assets and/or maintenance. Very often this is what the couple themselves want. However, it is difficult to know with this approach whether the end result is fair as any valuation of a business, unless it is being sold, is necessarily conjectural.

To get around this the Family Court can be flexible – it is possible to share the income or divide the shares. Ideally the Court prefers not to leave one person with all the cash assets and another with assets that are tied up in something like a business. However, in practice, they often do just that.

Does the business have to be valued?

You and your spouse may agree a value for the business and how you wish it to be dealt with to save the expense of bringing in experts. However, it is advisable to consult a specialist family lawyer first as we will be able to tell you whether an expert accountant should be instructed in your case.

Sole-trader or business partnership

If one of you is a sole-trader, or works in a business partnership without the other, and there are no assets owned by the business which could be sold, such as business premises, then the business is merely an income-producing vehicle and will not need to be valued. Instead, if appropriate, the income stream can be shared by way of a maintenance order.

However, if there are business assets these may need to be valued and if the business-owner works in a partnership with a third party or parties, it will be necessary to look at whether he/she can draw on resources through the partnership to fund a financial settlement. Having said that, the court cannot make orders against any third parties involved in the business e.g. to lend money or dissolve the partnership, so in reality this is rarely an option.

If you are both in a business partnership “at will” (i.e. if there is no formal partnership agreement) and no-one else wants to carry on trading, the partnership will effectively come to an end so will not need to be valued. However, if there are other partners who want to carry on trading, the staying partners will need to pay the outgoing partner the value, if any, of their partnership share and you may require advice from an expert accountant to calculate this.

If you have a partnership agreement, then the procedure for partners leaving should be contained in that.

Limited Company

If one of you owns a limited company outright or has a significant shareholding in a business, then the business will need to be valued, usually by an expert accountant who specialises in this field, and the court will usually treat the business as simply another family asset which needs to be considered in the overall financial settlement.

If one of you has a minority shareholding in a limited company and there are other shareholders, then it is the shareholding that will need to be valued. If there are several people sharing the ownership of the business, the court is less likely to ask for assets within the business to be sold or for capital to be extracted from the business as to do so would damage the interests of people outside the marriage.

If you both hold shares in the business, these will need to be valued by an accountant and you may need to take tax issues into account. If one of you is less involved in the business than the other and that person is a director or company secretary you should seek legal advice on removing them from the company as this can be very complicated.

How do I get a business valuation?

Often it will be sufficient for you to ask your accountant to provide a valuation of your business. He or she should ensure that the value takes account of how the business is currently trading, its future prospects, the prevailing market conditions and any likely change in circumstances for either you or your spouse.

We will be able to advise you as to whether an expert valuer should be instructed to provide a valuation in your case. If so, we can draft a letter of instruction and work closely with the expert to ensure that a fair and meaningful estimate is arrived at.

There are numerous methods for valuing an unquoted company and we are used to working with expert accountants to ensure that the most appropriate method is used in each case.

Will the business have to be sold?

If a suitable alternative cannot be found, a sale of a business or part of the business may have to be considered.

The vulnerability of a business on divorce is summed up by the comments of a judge in a 2001 case, who stated that “Those taboos against selling the goose that lays the golden egg have been laid to rest. Nowadays the goose may well have to go to market for sale.”

However, it remains the case that wherever possible the courts will strive to avoid this and will not require the business to be sold if there is any other reasonable and practical alternative.

Solutions which avoid a sale

Practical solutions which should be considered to minimise the impact of a divorce on a business are as follows:

• the transfer of liquid business assets or proceeds of sale of fixed business assets (e.g. property, vehicles, monies in bank accounts) to the non-business-owning spouse;
• transfer of non-business assets to the non-business-owning spouse (e.g. giving them a larger share of equity in house, cash assets etc) to offset against their interest in the value of the business);
• payment of lump sum by instalments to the non-business-owning spouse – e.g. where business owner can increase earnings for a limited time or increase borrowing;
• agreement to pay to the non-business-owning spouse a percentage of the net proceeds on any future sale of the business;
• payment of on-going spousal maintenance to the non-business-owning spouse.

What should I do next?

It is important to take independent legal advice from a specialist family lawyer as soon as possible as good legal advice should save you money and help you to achieve your objectives for you and your family. At BLB we will do our best to help you resolve things constructively and without unnecessary legal costs being incurred.

For more information, please email the author of this article, Sarah Jackson, specialist Family solicitor and member of the Law Society’s Family Law and Advanced Family Law accreditation schemes.

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