Family businesses can take decades, or even generations, to build successfully. But what happens when the owner(s) gets involved in a divorce? Philip Hoddell discusses the pitfalls and offers some advice on how to protect business assets.

The existence of a family business can considerably add to the complexity of a divorce.  Where nothing is otherwise specified, there will be an assumption that the business is one of the assets of the marriage. If both husband and wife work in it, it is quite probable a court will assume they own it equally. That, of course, may not have been the original intention at all.  

It has often been good advice to incorporate a business. This can limit liability to third parties and enable profits to be taken as dividends with a lower tax burden. It can help with investment.  

Of course, though, a company has its own legal identity and in the context of a divorce, there will be no assumptions made about ownership – rather the allocation of the company shares will determine that point. However, shares in a company are a marital asset and the court has power over marital assets in divorce proceedings. 

The three main themes that it is important to consider when discussing businesses and divorce are these:

1. Protection - A good partnership or shareholders’ agreement, professionally drawn up and entered into when the business is formed, can be very valuable in the divorce courts. Such an agreement shows what the original intentions were and will be influential if a court has to decide what to do with the business assets.

2. Valuation - Unless a company is listed, it can be very difficult to value it. It is almost certain that the advice of a specialist accountant will be required, and sometimes a full formal valuation will need to be undertaken. The valuer will want to bear in mind whether proper remuneration has been allocated to the family members, the soundness of the trading base, who else is involved and how that should affect the value of the business interest or company shareholding. 

3. Allocation of the assets - It is often the case that one spouse has been the driving force behind the business and the other has provided backup or support, valuable but unlikely to mean that they alone could take the business forward. It is, therefore, more likely that one spouse will have a better claim than the other with other matrimonial assets being offset in order to achieve fairness.  However, business assets carry more risk and it would be usual for there to be a discount to reflect that fact. 

What of the generational business?

Some businesses have been handed down over many years. For example, retail, agricultural and even sometimes professional businesses may have been started by parents, grandparents or even great grandparents.  

The likely approach taken by a court here will be to look at which family brought the asset into its original being. That spouse is more likely to be allowed to retain the business.  Consideration for the asset will still have to be paid though, and this can lead to the sale of land or buildings, or the issue of non-voting but dividend-bearing shares.  

In extreme circumstances, even an overall sale of the business or company in order to satisfy both spouses’ reasonable financial needs may be necessary.

Dealing with a business in divorce is a highly complex and specialist area of work. The legal issues can be difficult, valuations complex, and there is often an emotional overlay which further complicates the situation and can make it hard to see a way through the legal difficulties. 

For that reason, it is important to get good legal advice at the birth of a business. If that hasn’t been done, it is even more important to get good legal advice if the ‘family’ side of the family business is coming to an end.