Separation and divorce are without doubt a difficult and stressful time, and one that is made much harder when a family-owned business is involved.
Owner-managed businesses are the backbone of the UK economy. They employ three-fifths of the UK workforce and, according to the Federation of Small Businesses, contribute 50% of the turnover of the private sector. Many of them will be family-owned, perhaps started jointly or by one party who then employs family or involved their spouse.
Running a business is all-consuming and often stressful, and that stress can sometimes put strains on a relationship. But what should you do if your relationship falls apart and there is a business at the heart of the family’s wealth?
There is a common misconception that separation and divorce will force the business to close with its assets divided equally between both parties. But that is rarely the case. The courts recognise that a family-owned business can provide both parties with a fair settlement that can see the business continue to operate. The courts do not want to ‘kill the goose that lays the golden egg’, not least because often this is an income-generating vehicle and one which the family has relied on throughout their marriage.
The starting point is that a family-owned business which has been mingled during the marriage is considered an asset much in the same way as property and savings and will form part of the post-separation agreement. How that asset will be divided will depend on a number of factors, such as liquidity, how its value compares to other assets owned by the family (keeping in mind that business interests are more risky assets than cash or interest in real estate), fairness etc.
To understand that it will be necessary to have an independent valuation of the business conducted by a specialist accountant. The methodology adopted for the valuation will depend on the business. Valuations may look at the assets held by the business, the earnings it can provide, or a combination of both or other factors. For example, a property development business, where profits may take many months if not years to realise, will understandably be treated very differently to a consulting business with a predictable monthly income stream.
Bishop & Sewell works with many reputable accountancy firms that can lead that valuation. The appointment of an accountant will need to be agreed by both parties if this is to be adopted as an independent valuation by a single joint expert.
It is understandable that in most separations it will not be desirable or possible for parties to continue to work together in the family business, the aim being that the parties achieve financial independence at separation.
Where spouses are both shareholders one party will look to ‘buy’ any shares held by the other, enabling the business to continue with the other party receiving a lump sum and/or ongoing periodical payments if these are appropriate.
That lump sum payment may be delayed where profits are dependent on a future event; for example, the sale of development property or an exit via sale or stock market float. Here, any lump sum will likely be determined as a percentage of profits, especially where there are unknowns and risks.
Protecting a business
Business owners can take steps to protect their business with a prenuptial or post-nuptial agreement. It can be helpful to have clear guidelines on the roles of family members and decide whether, in the longer term, it is sensible to have non-active family members ‘on the payroll’.
Consider too employment regulations; claims of unfair or wrongful dismissal and expensive employment tribunal claims.
Business owners and their partners are encouraged to take early advice when separating to best protect your personal and commercial interests.
Contact our Family and Divorce Teams
The above is accurate as at 25 January 2024. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.