The impact of divorce on business owners: Strategies for a smooth financial transition
- AuthorPhilip Hoddell
How is the family business treated in divorce?
Alongside property, pensions, and investments, the family business can often form a substantial part of a high net worth couple’s assets. Indeed, the business may have been the source of the other assets and has been operating for decades.
The starting point is usually to value the business or the couple’s shares in it if they don’t own it all. That is likely to involve the use of a forensic accountant. For anything other than a very modest business, the judge will order a valuation, whether both spouses agree to it or not.
It is useful to note that where a couple owns all the shares in a business between them, it is likely that the court will treat it as a quasi-partnership and not apply a discount for a minority shareholding.
What do you do if your spouse is a part owner?
It is very common for both parties in a marriage to work in the family business. However, it is often the case that one or the other is playing a more supporting role. In those circumstances, it would be more usual for a court to allow the active spouse to retain the business following divorce, but the value of the business would have to be brought in and offset against other assets.
A court may well decide that because business assets carry more risk than other ‘copper bottomed’ assets, such as property or investments, some discount should be applied at this stage. For example, if the value of the business is £3 million, the offset might be somewhere between £2 million and £2.5 million to recognise the risk being carried going forward.
Difficulties can arise if there are not sufficient assets to offset. In those circumstances, the continuing business owner can face a situation where they need to raise funds if they want to take over sole control of the business. That might not be easy. It used to be thought that a court would never ‘kill the goose that lays the golden eggs,’ but a succession of cases has dispelled that notion and reinforced that a court will treat the family business as an asset and will raise money from it if necessary to meet the reasonable financial needs or entitlements of both spouses.
How can you prevent these issues from happening?
Every incorporated business should have a shareholders’ agreement, whether the shareholders are connected or not. This sort of agreement is one that is drawn up and then hopefully never needs to be referred to again, but it is invaluable if the need does arise. It would be influential when a divorce court is considering what should happen with the business. For example, it may set out who would gain control in the event of a dispute and how a fellow shareholder (spouse) should have their share paid out to them in the event of them needing to leave the business itself. If the business is a partnership rather than a company, a partnership agreement can be used to achieve the same objective.
If no such agreement exists, then, on divorce, it is vitally important to address the issues at an early stage to avoid the risk of marital disputes having a negative effect on the profitability of the business itself.
Are there any other options?
It is unusual, but not unknown, for a divorced couple to carry on running a successful business together. On a few occasions during my career, I have come across a situation where a couple agree that they can’t get on together in life, but they are still very successful working together in business. It is perfectly possible to regulate that situation as well through a combination of the divorce courts and a shareholders’ agreement/partnership agreement to bring clarity to future arrangements and to ensure that everyone continues to benefit from what may have been decades of hard work building the successful business.
For more information about how we can help, our family solicitors all offer a free initial 15 minute telephone appointment to discuss your needs. I can be contacted on 01206 217320 or via email at firstname.lastname@example.org.