What’s yours is mine and what’s mine is yours - except for the family business

What’s yours is mine and what’s mine is yours - except for the family business

Have you ever considered whether your family business would survive a divorce?

Families have for years built businesses through generations whether in IT, manufacturing, building and various other trades. Such businesses have been on a rollercoaster following more than one recession, a fluctuating economy and now Brexit. However, businesses are not only subject to economic turbulence as personal circumstances can cause an equal amount of disruption and distress. Have you ever considered whether your family business would survive a divorce?

Family businesses are often built up through the bloodline with children following in the footsteps of parents, but they also branch out to spouses. It can often be tax efficient to make a spouse an employee, Company Secretary as well as a shareholder. However, making decisions based on what your heart says or in order to be more tax efficient can be costly in the long run.

Your business may have been running for years before you were married, and then you marry and perhaps, sadly the marriage breaks down.  It is at that stage that you may regret giving away shares to your spouse, as they are unlikely to return them without proper financial consideration. Even if you have provided the shareholding as a ‘gift’, you can be sure that this gift will not be returned!

That old adage of ‘what’s yours is mine and what’s mine is yours’ can ring true on divorce.  The starting point when you look at divorce proceedings is often an equal division of capital and potentially income, followed by the Court considering why you should step away from this position of equality.   

If you have a family business when exiting a marriage, you would no doubt argue that this existed pre-marriage and should therefore be discounted from the matrimonial pot.  However, if the business is the main asset and no other funds available you may struggle to make this argument.  Usually, the Court will only allow you to ring-fence the assets if they are not required to satisfy the needs of the other spouse and more importantly the children of the marriage.

However, your family business may have increased in value since the point of marriage, or start of the relationship and this value should therefore be taken into account and ring-fenced as a result.  It’s hard to assess this value retrospectively and you would often need a forensic account to undertake this exercise. In an ideal world, you should carefully consider your options prior to getting married, and ensure that a valuation is done at that time, but in reality who does that?

It is not uncommon for some family businesses to bring in non-family members to boost the business such as a new partner, shareholder or director. Of course when doing so, an exercise of due diligence is carried out to ensure the business partnership will effectively be a ‘happy marriage’ and when bringing in a new romantic partner into the business a similar approach should be taken.

Although going through the lengthy due diligence exercise may be unrealistic, speaking to a family lawyer to assess what options are available could pay off considerably in the long run and help to avoid complex divorce proceedings. For example, a pre-nuptial agreement could be exactly what you need.  For some people this is unpalatable and can be very unromantic, but for others it is a sensible planning tool, which can save a huge amount of heartache and money if the worst happens.

Bringing a new partner into your life is of course incredibly important and no doubt requires a considerable amount of thought, emotion and planning. This is multiplied further if also introducing them into the family business too, so always give it a lot of thought and take some advice, so that you all go in with your eyes wide open!

For more information please contact Zahra Pabani, Family Law Partner
Email: zahra.pabani@shma.co.uk Tel: 0121 214 0318