A family business is no longer safe if a couple divorce.
Historically, courts would seek to protect a business venture from being heavily involved in a divorce settlement to prevent the threat of it having to be sold off to meet the terms of any financial settlement. Instead, a partner’s “reasonable needs” would be catered for as part of the settlement, with the business owner retaining the majority of those assets. However, a landmark ruling in 2000 in the case of White v White changed all that and a business is now more than ever counted as a matrimonial asset to be carved up alongside property and bank accounts.
The Whites had been married for 33 years with grown-up children. Assets totalling £4.6 million were largely tied up in the family farming business. Mrs White fought for an equal share of those assets. The House of Lords awarded Mrs White £1.69 million – 40 per cent of the family assets. As a result, the farming business had to be sold.
A similar line was followed in a case the next year when the judge famously proclaimed: “Those taboos against selling the goose that lays the golden egg have been laid to rest. Nowadays the goose may well have to go to market for sale.” This statement is often quoted still.
Valuing a business on divorce
The fallout from this is that courts are much more involved in agreeing the calculation for the worth of a business involved in a divorce and how that should be reflected in a settlement rather than should it be considered. This is why it is essential that a specialist family lawyer be involved in the process at an early stage. They can advise on the best course of action after looking at whether the worth of a business is going to be assessed on a dividend basis, an asset basis or something else.
Such assessments are affected by things like whether it is limited company or a partnership. If a person is a sole trader, the business as an asset would again be considered in a different way. For instance, in many cases, trying to value the business separately from the person running it would be almost impossible.
How to use the business value in a settlement
Once a suitable route is decided on, how to raise the settlement will then be the next issue to tackle and varies from case to case. This could cover things like the liquidity of a company, the amount owed by a firm, shares owned in the company by the two parties and any salaries paid. Increasingly though, sale of part or all of the company is the only way to raise the capital needed to meet a settlement.
Generally, the starting point for any settlement now is a 50/50 split of a couple’s assets, but it is simplistic to suggest a spouse gets half of everything. The court will take a lot of factors into account, such as the length of the marriage, the needs of any children and future income.
Of course, it is not just the financial issues which need to be considered when a business is part of a marriage break-up. There is the inevitable emotional turmoil a person will be going through which could lead to a drop in productivity.
In some instances, a spouse will have a direct role in the company. A divorce could see them leaving the position, which impacts on the day-to-day operations. Alternatively, the spouse could occupy a less active role, like being listed as company secretary. This can make things more complicated, requiring an agreement from the company secretary and other directors to remove them and Companies House will need to be informed to avoid any future claims or liabilities relating to the firm.
From the outset of a relationship, family business owners particularly are advised to have a prenuptial agreement drawn up. The simple process of preparing the agreement can iron out confusion over who’s entitled to what in relation to the business. Provided it is prepared correctly by a specialist family lawyer, this can significantly help in the event of a divorce.
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