Family businesses come in all shapes and sizes and in the event of a divorce the courts can adopt any one of a number of approaches to the business.
The usual starting point when assessing a financial claim on divorce is to look at what are the non‑marital and marital assets with the principle being that marital assets should be divided equally and non-marital assets should be retained by the person who owns them. Marital assets are assets acquired or built up during the marriage with non-marital assets being assets brought into the marriage or acquired during it by way of gift or inheritance.
Family businesses tend to fall into any one or more of the following categories:
- Inter-generational businesses, typically established by a parent and grandparent.
- A business established before the marriage, but which grows significantly during the marriage.
- A family business in which both spouses are actively involved.
- A family business where there are third party shareholders.
A successful family business may well be the largest asset in a case and in the case of very successful businesses worth millions or tens of millions, it may well dwarf the value of all other combined assets. Even in a straightforward case where a family business is clearly a marital asset, there is never a one-size-fits-all solution.
The business will need to be valued, probably by a single joint expert. Valuation is an art not a science and there are a number of approaches that can be taken and it would be for the expert to decide on what they considered to be the most appropriate course in respect of any individual business. The expert will usually also be asked to look at not only its value, but also the liquidity of the business and the ease in which money can be taken out as well as whether an appropriate level of remuneration is being taken. There will inevitably be tax considerations that will need to be factored in.
The courts rarely want to ‘kill the goose that lays the golden egg’ so while a judge has the power to order the sale of a business, it is usually a solution of last resort, except in cases where the parties may be approaching retirement.
With inter-generational family businesses, the court cannot ignore their value, but a judge will be loathe to interfere with the business. There will usually be other family members who are shareholders and it may be their sole source of income. Subsequent generations may be looking to go into the business.
With businesses set up for a marriage, but then grow substantially during the marriage, it is unlikely that they will be treated entirely as non-marital. Regard will be had to the fact that the business will have had a value at the date of a marriage and look at the increase in value from them to the date of divorce. There may be complex arguments as to how the increase in value should be treated.
Where spouses are in business together, sometimes it is possible for them to continue working together despite the breakdown of the marriage. Where this is not possible, one party usually has a stronger attachment and will buy out the other’s interest.
It may be possible to protect a family business, especially with businesses established before a marriage by having a prenuptial agreement that excludes the business from division on divorce. Otherwise, one can look at having shareholder agreements that provide a degree of protection from claims on divorce. This is particularly worth considering where there are external shareholders who would not want the business affected if one of the shareholders were to get divorced.
The owner of a successful business is going to retain the business as a term of any settlement. This will mean that their spouse is then going to retain the lion’s share of the other (liquid) assets. Retaining a business means that you are retaining risk-laden assets and if the business drops significantly in value, you will not be able to try to claw back any of the liquid assets that your spouse took in the settlement.
Contact our Family Team
The Family Team at Bishop and Sewell has a wealth of experience in dealing with cases involving family businesses and expert advice is essential. There will inevitably be issues of valuation, liquidity as well as tax consequences to consider in relation to a family business on a divorce before negotiations can commence.