The family business comes in all shapes and sizes and agreeing on the financial settlement following a divorce where a family business is involved can raise many complex issues involving inheritance, financial contributions and other family members having a share or interest in the business.
In today’s uncertain economic climate and in the event of a divorce, the business needs to be protected as quickly as possible for its survival and commercial viability in the future.
Understanding the business structure
Understanding the business structure is the first step in determining how the business will be treated in divorce proceedings. The most common three types of business are:
- The sole trader is the owner and controller of the business assets and is personally liable for the business and its debts.
- Partnerships can be formal or informal. There are various types of partnerships and because of this, the business structure can be more complicated. Partnership shares and ownership can vary as can business liability.
- A limited company can also be more complicated. This involves the issue of shares and appointment of directors within the company. There can be many owners of the business with restrictions being placed on the transfer of shares in the business.
Once you have established the family business structure, the next step is to value the business.
How is the family business valued in divorce proceedings?
It is important to value the family business as this determines what is in the ‘matrimonial pot’ for distribution between the divorcing couple. The valuation will almost always be based on the current market valuation.
Normally the valuation will be carried out by a single joint expert who will be an independent qualified accountant. In order to carry out the valuation the accountant will require full financial disclosure in relation to the business consisting of financial and management accounts. The accountant may also be instructed to deal with other issues such as:
- The liquidity of the business in order to raise funds and Capital Gains Tax payable on the transfer of shares; or
- Disposal of the business.
When the family business involves land and buildings then it will be necessary to instruct an estate agent as a single joint expert to provide a valuation on these assets too.
What could happen to the family business during divorce proceedings?
The final stage of the process is to decide how to deal with the family business as a settlement. This will normally involve three options:
- Putting the business up for sale: This option enables a divorcing couple to sell the business and divide the profits. However, selling the business may not always be practical or feasible for various reasons.
- Buying out the other spouse’s interest: This can involve a cash payment from the business in order to achieve this objective. It can also involve a set-off, for example, one spouse taking ownership of the family business and the other spouse taking ownership of the former home.
- Co-owning the family business: For divorcing spouses who do not wish to sell the business then co-ownership of the business is another option if they are able to continue running the business together.
How can we help?
Emma Davies is a Partner in our expert Family Law team, which is ranked in Tier One in the independently researched publication, The Legal 500. Emma advises on divorce and financial settlements which involve complex issues and substantial assets.
If you have a family business and are getting divorced, working with solicitors and other professionals who have expertise in dealing with family businesses is key. They will be able to deal with the valuation and taxation implications in order to ensure the business is not at risk going forward and at the same time achieve a settlement which is fair and reasonable.
For more information or if you need help through the divorce process, please contact Emma or another member of the team on 0800 024 1976 or via our online form.
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