Will you have to sell the golden goose?

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Amongst all the anxieties facing a couple who are separating, for those who run a family business together, the future of the business can be most worrying. The business might be run by the husband and wife as partners or it might be a small venture run solely by one of the parties or a limited company. Whatever the business type, the most pressing question for many is often what will happen to the business if we divorce?

Every case is different and many factors have to be taken into account. Despite myths to the contrary, a family business will be treated as an asset of the family in the same way as the family home and any other assets. This means that a spouse is likely to be entitled to a share of the value of the business even if they had no direct involvement in it.

The first step towards agreeing a settlement in respect of the finances is for both parties to provide full and frank disclosure of their financial circumstances. Included within that disclosure would be valuations of all the family assets, including the business.

Valuing a business is not as easy as it sounds and is certainly more complicated than valuing a house for example. There are many factors which have to be considered which include its assets, goodwill, tax liabilities and projected income. It is important that the business owners work closely with their accountants to ensure that a fair estimate of its value is provided. If the couple do not agree on the value then it may be that a more formal and accurate valuation needs to be acquired jointly between them which may require the assistance of a forensic accountant for example.

Once this information is gathered the negotiation process gets underway. This can take place in a number of ways, including Mediation, Collaborative Law or by correspondence between solicitors. The court or a referral to Arbitration may be necessary if the other options are unsuccessful.

Once a suitable route is decided on, how to deal with the settlement will then be the next issue to tackle and will vary enormously from case to case.

One simple solution is for one party to buy out the other’s interest in the business or that the business interest is off-set against another family asset. For example, the family home may be transferred to one party on the basis that the other party retains the family business.

Where there are no other assets to off-set, or in a case where each party is vital to the business’s success, then there would need to be an alternate approach. This might involve one party remaining alone to work in the business, but that the other party continues to receive a portion of the business income.

If a suitable alternative cannot be found then a sale of the business may have to be considered. Historically the courts have tried to protect ‘the goose that lays the golden egg’ but following landmark cases in 2000 and 2001, the court’s approach has changed. However, it remains the case that wherever possible the courts will strive to avoid a sale and it is unlikely they will require a business to be sold if there is any other reasonable and practical alternative.

There are some protective measures available but these will need to be given careful consideration early on and should be in place well before divorce is contemplated. If one party is seen to be moving assets or shareholdings for example then this could have a very negative impact on their case. The courts have powers to set aside any transactions that are specifically designed to avoid future financial claims on divorce.

If you run a family business with your partner, here are some important points to consider:-

  • A pre-nuptial agreement or post-nuptial agreement can be helpful in limiting claims against a business, but it will depend upon the timing of the agreement.
  • Keep the business entirely independent from private assets if possible, e.g. avoid borrowing against the family home for the business.
  • Liaise carefully with accountants about the structure of the business. For example, weighing up tax advantages and the risk of a claim by a spouse who has been appointed as the company secretary could be crucial.
  • If the business is jointly owned with other outsiders then the court may be less likely to take steps which would damage the livelihoods of the other shareholders.

Whatever your situation, it is vital you seek legal advice at the earliest opportunity.

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