Amongst all the fears and anxieties facing a separating couple – where are they going to live? How will they tell the children? Will there be a divorce? – is often a big question mark over the future of the family business. This might range from a modest venture, run by a husband and wife in partnership, through a family run limited company to the ownership of shares in a much larger enterprise. It might be a business set up by a couple in the early years of their marriage or might be a company started up generations before and passed down through the family.
In these sorts of situations, there is likely to be an avalanche of questions, such as:
• Can an inherited business be protected from a spouse’s claims?
• Can the value of a business owned by one spouse prior to the marriage be ring fenced?
• Who will get to run a business previously operated by a husband and wife together?
• Will the business have to be sold?
• What is the business worth?
Value
This is the crucial starting point, since the fundamental aspect of any settlement is to work out what is available to distribute between a divorcing couple. The value of a business will almost always be based on its present market value: on divorce, the bottom line is theoretically to convert all assets to cash, even if no sale is actually envisaged. In many cases, an appropriately qualified accountant will be needed for this task. They will usually need detailed information on the background and current financial performance of the business and may also be able to help with practical issues such as the sale of shares, the raising of funds from the business, the best strategy to preserve the business and various tax consequences.
A formal valuation is not always necessary or appropriate though. A company might not be worth the expense, or there might have been a recent offer to buy it. It is common to find a company which is really nothing more than an income stream, with no inherent value; for instance, where a sole trader, whose business depends solely on goodwill, will soon retire.
Husband and Wife Businesses
What happens to a business run equally by a husband and wife as a joint venture when the couple part? There are obvious dangers and difficulties if a couple try and maintain a business when their relationship is over and they no longer get on. It is often better to look for a way for one or the other to take it on by themselves. There are instances when that might not be sensible however. In a recent case, the court refused to transfer a business to the husband as he requested because it felt that it was impossible to be clear about the value; to ensure fairness, each retained a half share. In this situation, practical solutions are needed to ensure the successful continuation of the business, such as the creation of “B” shares attracting a dividend but no responsibility for day to day management.
If a business is already owned and run by only one spouse, or if it is to be transferred to one of them, the other can be compensated either by a lump sum (ensuring that future risk is shared out by a fair division of both the copper bottomed assets and the risk laden ones) or by the payment of regular maintenance, effectively sharing the future income derived from the business. In the latter instance, it is possible to achieve a capital clean break split later down the line at the point at which the business is eventually sold, releasing funds in order to capitalise the maintenance.
Those who are in the position of owning their own company which they started before their marriage may be interested to know that in a recent case, not only was the value of the business at the time of the marriage effectively ring fenced, but so too was an additional element designed to account for “latent” value or “passive growth”.
Inherited Family Businesses
There is currently a trend towards distinguishing between matrimonial assets generated during a marriage by joint effort and assets brought to a marriage by one of the parties, so there will be no automatic right on the part of the other party to share in the value of an inherited business. Efforts will also be made to avoid a forced sale of a business if at all possible.
Family lawyers make much of the need to share out the “family pot” and warn that it is often immaterial whether assets are held in joint or sole names. In some situations however, such as in relation to inherited businesses, keeping everything entirely separate is a distinct advantage to the owner. In one recent case, a wife’s inherited shares grew in value during the 21 year marriage from£290,000 to nearly £60 million. On divorce, the husband received only £5 million and it was highly relevant that the wife had kept the shares in her sole name and that the husband had nothing at all to do with them during the marriage, save to the extent that the income had supported the family.
This is necessarily a simplified account of recent trends and court decisions. It helps to demonstrate the basic principles but there are always lots of factors at play. However, every case is different and it is important to take advice on your own particular circumstances.
If you would like a further information on any of the issues raised, please contact Meg Moss, Family Partner at Mowbray Woodwards Solicitors on 01225 485700 or via email at mlm@mowbraywoodwards.co.uk