What are the potential issues experienced when a divorce threatens to break up a family business?

Divorce in the UK

Currently there is such a high rate of divorce in the UK meaning that many couples are having to go through the process of dividing up the assets gained during their married life. The most common issues which are experienced by couples divorcing are financial issues surrounding the shared marital home and issues surrounding the custody of their children. However, the effect of divorce on the family business is an issue which is becoming increasingly commonplace.

The family business

A huge amount of the UK workforce currently works in family owned businesses – in fact the largest single group of employees in the private sector work in a family owned business.

Is there a definition of a family owned business?

There is no standard structure for a family owned business as it can consist of anything from small newsagents to certain giants of the high street with huge amounts of annual turnover. One of the most common things, however, in most family owned businesses is the way the shares have been split. Often the shares will be split between a husband and wife as this is the most tax efficient option when the business was started.

However, this does clearly increase the potential for problems when a couple both owning shares in the family business go through divorce proceedings.

What issues will be experienced by a family business following a divorce?

The main issues concerning what will happen to a family business following a divorce will usually fall into one of the following categories:

  • The potential sale of the business

  • The contribution made to the business

  • The potential restructuring of the business

  • The appropriate valuation of the business

The potential sale of the business

One of main issues which will immediately spring to mind when a couple both owning shares in a business get divorced is the issue of whether the court will order the business to be sold and the profit split equally between the two former spouses in the divorce settlement. However, it is extremely unlikely for the court to do this with a restructuring of the business often the most viable option enabling certain funds to be released for the benefit of one of the spouses.

The contribution made to the business

One particular issue which is often raised is that of the situation whereby one partner considers that he or she has made a greater and more significant contribution to the business. This will most often occur when one partner feels that due to their particular business skill and entrepreneurial flair is what has made the business such a success and that the involvement of the other partner has really been minimal and only applies to their name. However, this is only likely to give rise to that partner receiving a greater share of the business if they amount to genius and where the assets are of a very significant value. As a consequence this is an argument which is unlikely to apply to the vast majority of cases.

The potential restructuring of the business

In most cases the court will order the restructuring of the business in order to alleviate certain funds to be provided to the partner that does not wish to continue to be part of the family business following the divorce.  When a couple owning a family business together enter into divorce proceedings it is important for them to know that the business is safe and will continue to be so following the proceedings – restructuring is a way of achieving this.

The valuation of the business

The first thing to do prior to a potential restructuring is to have a full valuation of the business. The valuation should be undertaken by an expert jointly instructed by both parties meaning that the questions asked and the basis of the valuation are agreed beforehand as well as the choice of the valuer.

Can a spouse run into issues if this step is not taken?

The spouse wishing to gain a certain share following the sale of the business should ensure that he or she is fully aware of the value of the business as they can potentially run into difficulties. If one spouse who wishes to gain a certain amount following the sale of the business does not value the business properly they may expect to receive a certain amount according to what the other spouse claims the value of the shares are but when it comes round to going to court to sort out how much will be paid the amount could potentially be much less than was first though. This however, would not occur if a proper valuation had been undertaken.

Important that the individual wishing to retain the business values the business correctly

It is extremely important that the individual wishing to retain the business undertakes a correct valuation of the value of the business especially considering the current economic climate. For example if the value of a business is valued at a high price say 10million initially in the divorce settlement that partner will be required to buy the other out for 5million assuming the shares are split equally. If however, due to the current economic climate the value of the company and the shares drops dramatically they will still be required to pay the agreed amount.