Expert view: The impact of divorce on a family business

By Napthens

10 Jun 2013

Website

By Simon Gledhill, head of family at Napthens solicitors

A large percentage of businesses in this country can be described as a family business.

According to the Institute for Family Businesses, there are three million family-controlled businesses in Britain, which provide nine million jobs and turn over £1.1trillion. Some well-known family businesses include JCB and Warburtons.

These family businesses come in all shapes and sizes and are usually partnerships or limited companies.

Some are passed down through the generations and then typically one of the parties to the marriage will be in partnership with other members of his or her family. Others are started by a husband and wife together with both taking an active role in the business. These different situations require different approaches.

For all such businesses a divorce can have a significant impact.

In the majority of divorces where a couple have previously operated the business together, one of them will remain in the business, and the other will withdraw. The party who exits the business will be compensated, usually by receiving capital or maintenance.

Whatever the circumstances, a party’s interest in the business will be included in the matrimonial ‘pot’ which is shared by the couple on divorce – something which can create a range of issues to be addressed.

Problems often arise in valuing a party’s share in the business and thereafter in raising capital to buy the other party out without damaging the business itself. Usually it will be considered important to preserve the business, although in some cases a sale may be ordered by a court.

It is important to remember that many family businesses involve more than just a husband and wife team. Extended family and children can often be involved, and where this is the case the impact of a divorce can be even more significant and in such circumstances advance planning may be extremely beneficial.

There are a number of methods which can be used to protect a business. For instance, whilst the value of a party’s shares in a limited company are relevant, the divorce courts cannot make an order directed against the limited company itself.

Shareholders agreements can be used to counter the risk of shares being ordered to be transferred by the court. Pre-nuptial agreements can also be used to describe the parties’ intentions in relation to the business in the event of divorce by, for example, making it clear that the business is to be preserved as an income generator for future generations.

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