The Family Business and Divorce
Dealing with the stress and emotional trauma of a divorce is difficult at the best of times. Those pressures and stresses are heightened where there is a family business involved especially where that is the only method of providing a living or an income stream for the family unit.
In such cases, it is imperative that expert advice is taken as soon as possible to help protect or preserve assets in times of trouble.
There are many different types of business models used by family businesses. These can include shareholdings in limited companies, family partnerships or a party running a business as a sole trader.
Unlike a partnership arrangement a family business which is a limited company has a distinct legal entity. The shareholders do not own any interest in company property; such interest is in their shareholdings. In some cases, however, careful attention needs to be given as to whether the company’s assets are really those of the company or whether, in truth, the company is holding assets on trust for a spouse. If the latter is the case, that spouse is entitled to the assets held by the company. However it also follows that the court can make orders in respect of such property in divorce proceedings.
Depending on the legal structure of the business, different documents will be required to gain an understanding of the business. For a partnership, these will include the partnership deed and accounts and for a limited company, audited and management accounts, together with a clear understanding of the future prospect of the company including any prospect of a sale.
One of the key issues, on divorce, usually focuses on the value of the business so that can be incorporated into the equation when this and the wider family finances are to be re-distributed on divorce.
A number of questions will invariably arise in relation to the future of a private company. These often include:-
- Is there a market for the shares or any of the company assets?
- If the shares or assets of the company were to be sold, what would be the best mechanism to deal with such a disposal?
- How should the company be valued and if part of the valuation should be on an earnings basis what is the best approach to determining the maintainable profits and what s the range of appropriate profit to earnings ratios?
- How could money be raised within the company and paid out to the shareholders or directors?
- What would the likely effects on the business as a going concern and its valuation if monies were raised and paid out to the shareholders?
Such a valuation often requires the input from an external and independent accountant. On divorce, a court will only allow such expert evidence to be adduced by the parties if it is ‘necessary’ to assist the court in resolving the dispute between the parties. Each case and company is specific, however most companies which rely on income to enable them to trade will require some form of valuation to help the court.
Another point which, on a case by case basis, requires considered attention is at what date should the company be valued?
In the majority of cases, the court will simply require a current valuation of the business. However, where the company was started by one of the spouses and was in existence prior to the marriage, there may be a valid argument to seek to obtain a valuation both at the date of the marriage and at the present time. Again, such a point is case specific and requires expert advice.
Any party asserting that any assets pre dates the marriage is under the evidential burden of proving this. It is incumbent on such a party to prove this and produce clear documentary evidence to confirm the same.
However, guidance from the courts makes plain that the assessment of assets must be as at the date of the final hearing when the court deals with distributing the matrimonial assets. Exceptions to this rule are rare and probably confined to cases where one party has deliberately or recklessly wasted assets in anticipation of the final hearing.
Importantly, consideration also needs to be given to the costs of realising a shareholding and assets of the company as well as consequential taxation issues.
All of these, as well as many other, points require expert advice and guidance. The earlier that advice is sought the better the prospect of being able to help ensure the ongoing viability of the family business in the event of marital breakdown.
For further help or advice, please contact Lupton Fawcett's Head of Family, Chris Burns.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.