What happens to the family business on divorce?

It’s well known that divorce is one of the most stressful life events a person can go through. On top of the emotional turmoil of the separation can be the day-to-day challenges. For example, you could at short notice be moving house, making do on much less income, or suddenly seeing your children only on specific days or at specific times. What seemed to be permanent routines can forever be turned upside down by the events of one day. Then add to that the various demands – time, cost, stress – that come with getting to a financial settlement…

One thing that can remain predictable and constant during this brutal period is one’s work. The office can be a bit of a refuge. So spare a thought for those whose divorce also involves a family business. Perhaps founded, owned and run by one or both of the married parties, it might also generate the family’s entire income. These divorces can be particularly ‘challenging’.  

The first point to make from a legal perspective is that a family business, like any other asset held by a party to a marriage, can be ‘in the pot’ for division when it comes to a divorce. In some cases, it might be the most valuable asset and/or key source of income.

One challenge lies in the fact that a business cannot normally simply be sold and divvied up in the way that, say, a family home might be. And it might still be run day to day by the parties themselves. The family court recognises the difficulties in these cases which in a sense involve competing interests: that of the business itself versus the parties’ now individual interests.

So how do we approach cases which involve a family business?

First, some basic questions need to be asked, including:

• What is the value of the business interest?
• How are the parties involved in running the business? If both are involved, is one evidently more important to its running than the other? Are third parties involved?
• What income does the business provide to the parties as salary and / or dividends?
• Is it feasible to withdraw any capital sums? If so, how much and when? Or could money be borrowed against the party’s interest to raise a sum for use in the divorce proceedings?

Clearly, answering some of these questions will require specialist knowledge. It could well become necessary to instruct a forensic accountant to advise on the valuation of the interest and some of the other issues listed above, such as liquidity.

Once the necessary information and advice is in place, there are a few ways the business interest can be dealt with:

1. One party keeps control of the business while the other benefits in another way

This could be by receiving more from the other available assets, or perhaps by receiving a lump sum payment (if necessary, this could potentially be raised from the business itself); or from receiving ongoing maintenance, or a combination of these options. If necessary, that spouse will retire from the business and/or transfer their shares to the other spouse.

The courts generally view a family business as being more ‘risk laden’’ compared to other assets such as cash or property because a company’s value can vary quite wildly depending on a range of factors.  A client’s attitude to risk and their personal priorities will always influence negotiations. Of course, who stays on in the business might itself be a big point of dispute if both parties have been equally involved.

2. Both spouses are made shareholders 

If there is no way of ‘paying off’ one spouse this could be considered. It would be more likely as an option where the business is valuable but there is little other capital available to the parties. This outcome would have the advantage that both parties then share the risk that comes with shareholdings, but on the other hand it might require them to have a future business relationship which is likely to be far from ideal. A detailed shareholder’s agreement would certainly be advisable to protect both parties’ interests and guard against future disputes.

3. The interest is sold

The court does have the power to order the sale of a family business, but it will usually only do so as a last resort. A sale will usually make little sense if the business also produces the income the family lives on. In certain cases, however, it might be the right way forward.

As always, the outcome will depend on the particular circumstances of the case. The first priority will always be to ensure the necessary information is available to consider the asset properly, then to consider a client’s particular priorities – to remain in the business or otherwise, and how this sits with the other resources available; and finally, to negotiate with those priorities first in mind. 

Planning ahead: pre-nups

Clearly, these divorces can become complex. If there is real acrimony, it can become extremely difficult to resolve things by agreement and protracted court proceedings may be inevitable. If that happens, legal costs will spiral. In the meantime, the business itself might be suffering as the parties fight over it and its actual performance drops down the list of priorities.

The existence of a family business can therefore be an especially good reason to consider entering into a pre-nup. Similarly, if a party is already married but then decides to start a business, a post-nup should be considered. The agreement could look ahead to the types of disputes that might arise and plan for them. Agreeing what should happen to the business on a divorce will potentially make resolving future disputes far easier, less stressful, and less costly if the worst does happen. Less disruption and legal wrangling will also be very valuable for the prospects of the business itself which ultimately could benefit both parties long into the future.