To the people who own them, family businesses are much more than just bricks and mortar. Many of them have been passed along for generations, representing the accumulation of decades of hard work. They’re a legacy that is often intended to be passed onto sons, daughters and grandchildren. With so much financial and sentimental worth at stake, it’s no surprise that the subject of divorce and the family business can provoke such intense feelings among spouses and family members.
If you own a company, understanding how the courts could approach business assets in divorce is vital. The fact that it’s been a feature of your heritage for such a long time isn’t reason enough for it to remain with you on principle alone. We’ll cover the methods, strategies and options at your disposal to ensure that future family members get to enjoy the fruits of your labour for decades to come.
How the Courts View Divorce and the Family Business
Essentially, the courts will apply the same mindset to divorce and the family business as they would any other high value assets. The overarching principle is for all parties to have their needs met with a fair share of any matrimonial (jointly-owned) possessions. However, establishing what should and shouldn’t be classed as being matrimonial, can be a complex undertaking.
If both spouses had built the business from the ground up during their marriage, it might be easier to class it as being matrimonial. However much will depend upon the wider picture, which includes how easily other high value assets, such as domestic and overseas properties, could be divided in place of the company itself. And, while the courts would be reluctant to force one party to sell their family business as part of a settlement, it is an option. Especially if there aren’t many other assets of a similar value to be divided.
Valuing Business Assets in Divorce
When it comes to divorce and the family business, it would be dangerous to assume that a company is in any way ring-fenced. In reality, it is likely to be a key feature of the overall division of assets. However, to determine its role in the finances after separation, it will first need to be valued.
The likelihood of a formal valuation usually increases in line with the value of the business. If this is necessary, a forensic accountant may be enlisted to calculate the business’s worth. To do this, there are a couple of common approaches:
- Net Asset Valuation: If the main worth of the company comes from the net assets it owns, this will usually be the accountant’s preferred approach.
- Earnings-Based Valuation: This method reaches a valuation by looking at what kind of earnings are realistic in the future.
When it comes to divorce and company ownership, it’s worth pointing out that even valuations can be contested. If the two parties cannot come to an agreement, a reevaluation may be demanded, with the evidence for this being presented to the courts.
Options for Division of Business Assets in Divorce
The subject of divorce and the family business is a complex area of law that could ultimately lead to the company’s division among spouses. If the asset is seen to be matrimonial, there are three typical methods that can be employed to divide it. These are; an outright/deferred sale, a share transfer, and offsetting. All three may be considered when
Outright/Deferred Sale
As owner of the family business, you could be asked to either sell it outright, or commit to a sale in the future. In this instance, you will be given the opportunity to run the company until a sale is achieved. Although this approach might allow both parties to go their separate ways more efficiently, it could be a last resort for anyone who doesn’t want to sacrifice their business assets in divorce or civil dissolution.
Share Transfer
Tackling divorce and company ownership could lead to a share transfer between spouses. This method could not only avert the hefty Capital Gains Tax bill you would incur from a sale, but might also limit business disruption and offer both parties a steady income. However, it won’t allow for a clean break, and much will depend upon how easily former spouses can handle the new dynamic in the years to come. This is especially pertinent if the business is split equally, as each former partner will technically have an equal say in how the company is run.
Offsetting
Offsetting requires the owner of the business to retain their position in exchange for other high value assets of equivalent value. Although it can be difficult to cross-reference the value of assets against each other, this is one of the most common strategies. Not only does it lead to a clean financial break for everyone involved but it also ensures that an owner retains their control of the family business albeit that retaining the family business often involves shouldering more risk in the future than the spouse who receives the ‘copper-bottomed’ capital assets such as property.
Preventative Steps For Divorce & Company Ownership
Perhaps the best option for safeguarding business assets in divorce is a nuptial agreement. While they are not legally-binding in England and Wales, they can be a useful form of insurance if both parties enter into them willingly, and fully disclose their assets. Nuptial agreements come in two forms with a ‘prenup’ being created before marriage and a ‘post-nup’ being drafted when the marriage has already started.
If you inherited the family business before you met your spouse, and there’s a significant financial imbalance as a result, a prenup could be an extremely useful document. This will give you the chance to limit any claims on the business in the future by stating that it should be excluded from the matrimonial pot. Although this doesn’t guarantee that the company won’t be divided, it does indicate how it was intended to be treated when the relationship was at its most cordial.
Lowry Legal: An Authority on Complex Divorce
Lowry Legal specialises in providing astute legal guidance across the full spectrum of family law. Our niche as a leading firm for clients with high net worth means we excel at unpicking even the most complex cases of divorce and civil partnership dissolution. This includes helping business owners and entrepreneurs to protect significant assets such as businesses, properties, trusts, and investments. Ultimately, we understand that divorce and the family business can be uniquely challenging and use our experience to find the right strategy for your circumstances.
A highly-regarded member of the Legal 500, we always aim to simplify the divorce process whenever possible. The collaborative approach is more likely to reduce the stresses and timescales involved, potentially leading to a more productive dynamic and reduced costs. However, if this isn’t feasible, we’ll provide robust representation that gets results.
Divorce and company ownership is a complex topic that doesn’t usually have a fixed strategy. We’ll put you at the centre of the process to ensure that everything we do serves your goals. This progressive, client-centric approach results in bespoke solutions that can overcome your biggest challenges.
For more information, or to arrange a consultation, get in touch with our friendly team today.
