The Impact Of Divorce On Family-Owned Businesses
By Kevin Harris-James, Partner and Head of Private Client and Family Law at the Birmingham offices of law firm Irwin Mitchell
09/10/2008
How easy is it to run your own business? The arguments ran that markets were as often global as local, thanks to advances in communications and transport, but any perceived increase in commercial opportunity was matched by blossoming red tape. Today, that position is tempered by the reported economic slowdown (or meltdown depending upon your sources of information). The answer, however, remains that it is challenging.
Entrepreneurs who have built empires often have common themes to their stories, particularly the investment of time and energy and the sacrifices made on the altar of success.
Such commitment is increasingly at the expense of family life, a saddening consequence borne out by the rate of divorce. Having established a successful business that has supported the family lifestyle, often with a succession plan of leaving it to the next generation, there can be little as disheartening as a divorce shattering not just the family unit but the enterprise itself.
A pre-nuptial agreement (PNA) may dispense with some of this, particularly if the business was under the stewardship of one or other spouse prior to marriage. PNAs, regarded by many as the preserve of the rich and famous, are increasingly popular, especially if one is entering into a second or subsequent marriage.
Much as a business may have key person insurance, a PNA is a form of health insurance for marriage - while you may not plan to be poorly, if the worse happens, at least you have cover.
Both parties must take independent legal advice before signing up to anything and no unfair pressure is allowed. Full and frank disclosure of assets is key - one party trying to hide money could negate the deal.
PNAs are widely recognised in the US as legally enforceable. The position is not quite so clear-cut here. However, increasingly the existence of an agreement and the weight to be given to it are factors that judges will take into account when deciding issues within a subsequent divorce or separation.
The court is more likely to find there was an intention that the agreement would be legally binding if it is confined to matters concerning property and money, rather than the minutiae of family life, e.g. permission to play golf every Sunday. And beware the patter of tiny feet - highly likely to mean the agreement will be reopened and renegotiated.
PNAs help define and regulate rights and responsibilities during a relationship and, perhaps more critically, in the event of a breakdown. Unravelling the business affairs of a party to a divorce can be like cutting the Gordian knot. Legal and accountancy expertise is required to manage and mitigate harm.
Kevin enumerates several areas to be explored at an early stage:
- The open market value of the business
- The value of the parties' interests in the business
- Whether the liquid assets of the business can be reasonably made available and, if so, to what extent?
- How capital can be extracted in a tax efficient manner
The court requires a broad evaluation of a business’ worth to decide a spouse's reasonable requirements. If there is liquidity which can be realised without irreparably damaging the business to meet these requirements it will be taken into account by a court in coming to a decision.
Obtaining a fair analysis demands accountancy expertise. The temptation for many business owners is to appoint the current auditors, but it is sensible to separate business and personal affairs and specify an independent source, thereby avoiding any suggestion of bias.
The court aims to achieve a fair and reasonable compromise having regard to all the circumstances. Where the business is the predominant source of the family's wealth, the court would be reluctant to kill the goose that lays the golden egg. It will initially consider trading other marital assets - such as the family home - to preserve the business. This is potentially good news for the employees and supplier/customer bases.
Often it's good news too for the spouse who has had the greater responsibility for building the business as it offers continuity and on-going purpose. The court will still need to arrive at a decision concerning the contribution made by the other spouse in the business's success, for example running the household so freeing up partner to devote themselves to building the business.
The overarching objective is an outcome fairly serving the interests of all parties. While divorce may bring family life to an end, it hopefully doesn't stifle and extinguish the entrepreneurial flair and acumen which gave rise to a business in the first instance.
Irwin Mitchell's Family Law department is recognised for its expertise in handling divorces involving complex business affairs running into many millions of pounds. The team operates on both a national and international scale, and is able to call upon independent expert advice as and when necessary. Anyone requiring counsel should contact the Irwin Mitchell family law experts for discreet advice on 0870 1500 100.