Family Businesses and Divorce

Many business owners are concerned about the impact that Divorce proceedings will have on their businesses and are unsure about how the business will be taken into account in reaching a financial settlement.

There are many different ways in which a family business might be operated but sole trader arrangements, partnerships (be that with or without any formal paperwork), or Ltd companies are most common. Those businesses might involve retail, manufacturing or provision of services and there might be specific market factors to take into account. The structure of the business may also give rise to additional issues around the status and responsibilities or obligations of a spouse in the business and whether dividend payments or other monies are due to them as a result.

To the extent that the business has been run throughout the marriage by one or both parties, for example, if one has been a company secretary (as is commonly the case) or has undertaken some work in the business, such as payroll or book-keeping etc. the business will be considered a “marital asset”. There may be some argument if the business was established by one party and successful at the outset of the marriage or if there has been some level of entrepreneurial skill shown by one party in developing the business.

Where assets are “marital” in nature, they fall subject to the principle of “sharing”. However, the way in which a business is considered in marital finance negotiations depends largely on the type of business and the issues in dispute and the business cannot be looked at in isolation but must be considered alongside the other assets of the marriage, such as property, investments etc.

There may be several solutions to achieve a fair outcome in terms of capital and income and having regard to the nature of the assets – such as share transfer, continued maintenance or off-setting any true capital value against other liquid assets but how settlement is structured will depend on a variety of factors including the other marital assets and the needs of both parties.

The Court is unlikely to enforce a settlement that sees a business unable to continue trading. It is unlikely that the Court will consider that the business should borrow against assets or otherwise fund lump sum payments if such borrowing or payments are not commercially viable.

Whether the business is to be considered a capital asset or one that is solely income –producing will need to be considered and this will depend, to some extent, on the needs of the spouse and whether there is any argument for one party to receive on-going maintenance from the other or whether a “Clean Break” can be achieved. The case law in this area makes it clear that the Court will be careful not to “double count” in treating the business as capital and counting its income as well. 

The Court has equally made clear that they will seek a “business solution”, which might often mean that a clean break cannot be achieved, because of the reliance that there would have to be on “snap-shot” valuations of the business – which can be undertaken by reference to a number of different indicators from the business accounts; such as earnings, assets, dividends and cash flow and which can lead to widely varying figures.

Cases involving Family businesses are complex and on separation specialist advice should be sought to ensure that all issues are considered.