How Divorce Can Affect A Family Business
How Divorce Can Affect A Family Business
Family Solicitor Emma Piff shares with us some useful facts about how a business is treated in a relationship split.
Like every family being different every family business is different. The family business comes in all shapes, sizes, values and importance. It can therefore be very difficult to deal with a family business that has evolved over the course of a relationship and then try and split it upon a divorce.
In today’s uncertain economic climate there are potential storms on the horizon for the family business and in the event of a divorce, the business needs to be protected as quickly as possible for its survival and commercial viability for the future.
Dealing with the family business following divorce can raise many complex issues involving inheritance, financial contributions and other family members having a share or interest in the business
Understanding the business structure
The first step in resolving the family business is to understand the business structure. There are 3 main types:
The sole trader is the owner and controller of the business assets and personally liable for the business and its debts.
Partnerships can be formal or informal. There are various types of partnership. In view of the position the business structure can be more complicated. Partnership shares and ownership can vary as can business liability.
A limited company can also be more complicated. This involves the issue of shares and appointment of directors within the company. There can be many owners of the business with restrictions being placed on the transfer of shares in the business.
Having established the family business structure, the next step is to value the business.
How is the family business valued?
The valuation of the family business is a crucial starting point since this determines what is in the ‘matrimonial pot’ for distribution between a divorcing couple. The valuation of the business will almost always be based upon the current market valuation. An initial starting point could be for the company accountant to initially provide a valuation. If this valuation is not agreed between the divorcing couple then a independent qualified accountant will be required to carry out a valuation as a single joint expert. The expert will require full financial disclosure in relation to the business consisting of financial and management accounts. The accountant may also be instructed to deal with other issues such as: the liquidity of the business in order to raise funds and Capital Gains Tax payable on the transfer of shares, or disposal of the business.
If the family business has land and/or buildings and/or premises then it will be necessary to instruct an estate agent as a single joint expert to provide a valuation of these assets.
What could happen to the family business?
The final stage of the process is to decide how to deal with the family business as a settlement between a divorcing couple. There are 3 possible options:
Putting the business up for sale: This option enables a divorcing couple to sell the business and divide the profits. However, selling the business may not always be practical or feasible for various reasons as the sale of it could mean a loss of income for either, or both, of the divorcing couple.
Buying out the other spouse’s interest: This can involve a cash payment from the business in order to achieve this objective. This can also involve a set-off, for example, one person taking ownership of the family business and the other person taking ownership of the former family home.
Co-owning the family business: For divorcing spouses who do not wish to sell the business then co-ownership of the business is another option. This would need to be carefully thought through as it is subject to the divorcing couple being able to continue running the business together and being able to get on for the benefit of the business.
How do the Courts decide who gets what?
The position of the family business was set out in White v White 2001.
In the case, the court dealt with a 33-year marriage and assets totalling £4.6 million, the main being the family farming business. The case went to The Supreme Court, where Mrs White was awarded £1.69 million, 40% of the matrimonial assets, which resulted in the business having to be sold in order to provide Mrs White’s settlement.
The current position is that the courts attempt to achieve fairness when dividing the matrimonial assets, and courts will only depart from equality where there is good reason to do so.
If your business is affected by a relationship breakdown and you would like an informal discussion about the best steps to take in your particular set of circumstances, then get in touch with Emma Piff.
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