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Impact Of Divorce On Family Firms

14th November 2017 Victor Collins, Nelsons Solicitors

The family business comes in all shapes and sizes and in view of this can often be the most difficult financial settlement to conclude following 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.

Why are there complications in these circumstances?

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.

How do the courts decide who gets what? 

Historically, the family court and trial judge would seek to protect the family business from being heavily involved in a matrimonial settlement in order to avoid the business having to be sold. In view of the position, it was previously possible to try and ‘ring-fence’ the business. However, the position has changed following the case 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. 

Since the case, the law has leaned towards fairness and dividing the matrimonial assets and courts will only depart from equality where there is good reason to do so.

Understanding the business structure

The first step in resolving the family business is to understand the business structure, of which there are three main types:  

1. The sole trader is the owner and controller of the business assets and personally liable for the business and its debts. 

2. 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.

3.  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. Normally the valuation will be by a single joint expert who will be an independent qualified accountant.  

In order to carry out the valuation the accountant 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.

When the family business involves land and buildings 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.  This will normally involve three options: 

1. 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. It will also mean ‘selling the goose that lays the golden egg.'

2. Buying out the other spouse’s interest: This can involve a cash payment from the business to achieve this object. This can also involve a set-off, for example, one spouse taking ownership of the family business and the other spouse taking ownership of the former family home.

3. 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. However, this is subject to the spouses being able to continue running the business together and being able to get on.

Professional advice

It is important for divorcing spouses to ensure the correct professional experts are instructed to deal with the family business on divorce. This not only involves specialised solicitors but also other professionals to deal with valuation and taxation implications in order to ensure the business is not at risk going forward and at the same time achieving a settlement which is fair and reasonable.

For more information on Nelsons Solicitors please visit www.nelsonslaw.co.uk 

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