How to Protect the Family Business on Divorce
If anyone ever thought marital problems and breakdowns may have reduced in the current economic client, the following statistics show just how wrong they are. There were 119,589 divorces in England and Wales during 2010, an increase of 5 per cent on the previous year. One in three marriages now breaks down by the 15th anniversary, with more couples in their early forties splitting up than in any other age group, whilst the average marriage now only lasts 11½ years. The recession has put couples under greater financial strain; divorce rates also rose in 1993 following the 1990-1992 recession.
When it comes to divorce involving a family business, the issues and costs of separating can be even more difficult. Family businesses account for 65 per cent of private sector enterprises in the UK. The statistics are even higher in farming communities, with 87 per cent of small to medium farming businesses are family owned.
To business people used to dealing with the constraints of commercial law, whether in terms of employment, contract, or health and safety, the wide discretion exercised by the divorce courts in a business’ affairs can be a shock. A divorce court’s actions all too often feel like meddling, with a successful business or farm often being sold, despite potentially having been in the family for generations, or the business or farm being heavily mortgaged to the point where it is crippled. There can be further complications, husband and wife being equal partners in the business, or other family members and adult children of the relationship being involved, too.
People must realise that businesses are not safe from divorce settlements. Historically, courts have been reluctant to send the golden goose to market and by and large the business has been viewed as a source of income. That approach has changed significantly in recent years and the court is far more likely now to make an order which may result in the need to either restructure the business or, in some cases, sell it.
In legal terms, ending the marriage is the easy part. The more complicated and expensive stage is sorting out the finances. Any business will have to be formally valued and, having ascertained the value of the business, the court will then consider how it should affect any settlement.
Accountants use different methods of valuation including an earnings basis, dividend basis or asset basis or a combination of these. The valuation will vary substantially depending on whether the business is a limited liability company, partnership or sole trader. Farming partnerships can be even more complicated because the farmhouse is often occupied as the matrimonial home.
Once this process has been completed, the business’ value is treated as an asset and forms part of the pot when it comes to the financial settlement between the husband and wife. The business owner, if there is a clear owner or majority shareholder, will have to fund the settlement, possibly by borrowing against the business.
You can take steps to protect your business by avoiding sharing ownership with your spouse in the first place. Company books should record that business interests are run independently. If all of the assets have been moved around on the say-so of a husband, then a court will assume that he is going to continue to draw substantial benefits in the future. Families should consider sharing ownership with wider family members because the court will be more careful to ensure that their interests are not prejudiced and the business will not be treated so readily as part of the matrimonial pot. Although they still feel very much the preserve of rich American celebrities, consider using a pre-nuptial and/or a post-nuptial settlement - or a family investment company, to ensure that wealth is passed down to future generations.
If divorce becomes inevitable, the court is a blunt and inflexible tool for resolving problems, especially in complex cases such as those involving children and businesses. There is a new way of divorcing called collaborative family practice and that enables the parties to work together with their lawyers to find a tailor made solution for their case. Collaborative law is the best way to ensure emotions do not spill over to harm the business and the income the family derives from it.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.