Amongst all the fears and anxieties facing a separating couple there is often a big question mark over the future of a family business, writes Meg Moss, partner & family solicitor at Mowbray Woodwards.
This might range from a modest venture, run by a husband and wife in partnership, or 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 a company started up generations before and passed down through the family.
The most common questions I am asked are:
- 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 and there are a number of different methodologies which can be used.
In most 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, including the most tax efficient way of extracting cash from the business. Very careful account needs to be taken of liquidity and risk: discounts might be applied to reflect these issues.
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. A valuation would not normally be undertaken for a sole trader or if periodical payments are to be made out of income to the non-business owning spouse.
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. If that is not advisable however, 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.
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’. It can become very expensive, though, when you start to consider valuations not only at the point of settlement, but also at the point of marriage or of separation.
An interesting aspect of business interests owned through a limited company is that the company is a separate and distinct legal entity and usually cannot be forced to transfer or sell its own assets, such as property.
Inherited family businesses
There is 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 £60m. On divorce, the husband received only £5m 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.
For anyone facing a divorce where there is a business interest, it is important to take legal advice on your own individual circumstances. Every case is different and we believe a bespoke solution works best.
To make an appointment with Meg Moss, call 01225 485700 or email mlm@mowbraywoodwards.co.uk
