Divorce is nearly always an upsetting experience and often becomes more distressing as the arrangements concerning finances and children progress. The situation can be considerably amplified when a family business is involved. Unraveling the assets of the couple from the starting point of a 50/50 split can soon descend into acrimony when the parties disagree on the level of entitlement and when there is a financially weaker spouse.
An entrepreneur with an existing family business is advised to protect the business before marriage by the use of a pre-nuptial or post-nuptial agreement to protect the assets of the business as part of succession planning and wealth management. The agreement can be revised over time if, say, the newlywed spouse, unconnected with the business, joins the firm and makes subsequently makes a significant contribution to the continuing success of the company. It is far better to have guidelines as to how the assets of the business are divided with the agreement of all parties.
A family business is not considered untouchable by the court when the financial arrangements are being decided following a divorce and the court's prime considerations are the financial needs of the couple. The court is unlikely to order a business to be sold to the detriment of the other owners in cases where the spouse is a joint shareholder unless there is no other viable solution. Whilst third parties such as shareholders are considered but the court's points of reference are:
- the financial needs of the parties' and of any children of the marriage
- compensation in the event of one party sacrificing their own capacity to earn to care for children or undertake any other responsibility that restricted their employment
- fairly dividing the marital assets built up during the course of the marriage
The marital assets can include business interests developed during the marriage or the growth in value of a pre-existing business and can include assets held in trust.
Annah Cheatham, an associate in Giambrone's family team, commented "the court has wide-ranging powers and any decisions regarding a family business are influenced by a number of variable considerations. The length of time the business has been established, its financial viability and liquidity as well as the degree that both parties rely on the business as a source of income, amongst many other factors." Annah Cheatham further pointed out "if the business was inherited or established prior to the marriage it is possible that some part of the business could be ring-fenced to prevent a claim being made against it. However, if the spouse who is not party to the business has financial needs that cannot be met by the matrimonial assets outside the business then their needs will take priority."
Where there is a family business involved in a divorce settlement Giambrone's family law team strongly urge all parties to thrash an agreement acceptable to all that preserves the business and its earning capacity rather than bringing valuation and liquidity issues into play where the parties may not be in agreement leading to a lengthy dispute. Our lawyers in the family law team have extensive experience advising divorcing couples on the most practical and economic way of managing the division of assets in a family business. Whilst each situation is unique and there is no common solution that can be applied across the board to all businesses, the three main options are, the sale of the business, one party buying out the other party or continuing to co-own the business and maintain a professional business relationship to run the business.
A detrimental hotly contested protracted legal action, centred around the division of assets can erode confidence in the business and damage the value. A range of professional advice is essential to ensure that the best possible outcome is achieved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.