Divorce & family business: practical & legal considerations
Navigating a divorce can be a challenging and emotional time. It’s likely that you and your spouse will be faced with difficult decisions regarding living arrangements and the division of property and finances.
But what if you also have a family business? Is it an asset that should be considered within divorce and, if so, what information do you need to share , and how should this asset be valued? As family mediators, we answer these questions in this blog and cover the practical and legal considerations of dealing with a family business on divorce.
What is a family business?
Broadly speaking, the Institute for Family Businesses (IFB) includes the following within their definition of family businesses:
- A business that has one owner; or
- A business that has two or more owners and the majority of the ownership is retained by the person or family that set it up; or
- For larger businesses (those with 250 or more employees), at least 25% of the business is owned by a family.
This blog will focus on the top two examples - i.e., businesses in which one or more family members have a majority ownership of the business.
Is a family business an asset within a divorce?
In short: yes, a family business is an asset within a divorce. However, unlike other assets within a divorce, the value of a family business is not just the amount that it may realise if it is sold (and understanding what this value may be is not necessarily straightforward). A family business also has a value insofar as it is likely to provide an ongoing income-stream to one or both spouses.
For most people, a sale of the family business is simply not an option – many lawyers will refer to this as ‘killing the goose that lays the golden egg’. When considering the value of this asset, a key consideration may be how to preserve the business without undue disruption in order for it to continue to provide an income to one or both spouses.
It’s typically noted that where the income is to be retained for the benefit of one spouse, this may also be of benefit to the other spouse in relation to payments of child maintenance and/or spousal maintenance.
Different types of business
The way in which a family business has been set up can be a relevant consideration. The main types of businesses are:
- Sole traderships - A sole trader operates a business under their identity - i.e., they are the business and the business is them. Any assets of the business (e.g., property, vehicles, stock, cash at bank & etc.) therefore belong to the person running the business and are considered as assets for the purposes of divorce. Likewise, the sole trader is personally liable for any debts of the business and they are accounted for as liabilities within a divorce.
- Limited companies - A limited company has a separate legal identity from the person or persons with significant control. It therefore follows that assets and liabilities of the limited company belong to/ are owed by the company itself and the relevant consideration upon divorce is the value of any shareholding that a party has.
- Partnerships - A general partnership is where two or more persons are owners of a business. Typically, akin to sole tradership,
the partners are the business and the business is the partners so any assets/ liabilities of the business are assets and liabilities falling
within the divorce and all partners are jointly and severally liable for the same.
You can also be a limited partner of a partnership - in which case, your liability for the business’ debts can be restricted but your access to profits is likewise restricted by the terms agreed with the general partner(s).
A partnership can also be a limited liability partnership (LLP), which, akin to limited companies, has a separate legal identity from the people who control the business.
What information in relation to the business will need to be disclosed on divorce?
As explained above, the way in which a family business is owned is relevant when considering the assets and liabilities that will need to be disclosed within divorce proceedings.
Sole traderships and general partnerships
For sole traderships and general partnerships, everything the family business owns and owes are considered to be assets owned or owed by the spouse or spouses involved in the family business; details of the same will need to be disclosed as part of divorce proceedings.
For limited companies, the value of the spouse(s) % shareholding is the relevant asset and the same will need to be disclosed on divorce. However, it is worth noting that the value of the shareholding may be informed by the assets/ liabilities of the company (see below).
Limited partnerships and LLPs
The relevant considerations when valuing limited partnerships and LLPs are outside of the scope of this blog as factors, such as the terms of any Partnership Agreement, can be pertinent.
Tangible and intangible assets
When considering the assets of a family business, it is important to recognise that a business can have both tangible assets (most commonly cash at bank, office & IT equipment, vehicles, property) and intangible assets. Intangible assets, as the name suggests, are more difficult to value as they consist of elements such as the name/ brand/ client base and intellectual property of the business.
Valuing a family business on divorce
Different methods of valuing a family business
There are several different ways of valuing a family business which can include reference to:
- the net assets/ liabilities of the family business
- the income/ profit generated by the family business
- the trading history of the family business
However, valuing a family business is far from straightforward and it can be a potentially costly exercise.
Obtaining expensive, forensic valuations may not be pragmatic. By way of example, if the business (under whichever type of ownership) consists of one person providing IT services, and there is little in the way of cash at bank/ IT equipment/ property or vehicles, the reality is that the business will have little to no resale value. Put simply, who is likely to buy a business that they cannot then make a profit from?
In all cases, it is important to take expert professional advice.
Find agreements with family mediation
Divorce can be an emotional and confusing time, especially when a business is involved. Family mediation can help you find clarity in your next steps and come to a mutually agreeable solution. Learn more about how our family mediation services can help you.
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