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How are Family Businesses Dealt with in Divorces?

by Ridley&Hall in Divorce, Family & Matrimonial, Vicky Medd posted January 9, 2024.
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Divorces often present complex challenges, and when family businesses are involved, the complexities can multiply. This is particularly true when the business is primarily associated with one side of the family. In this blog, we will explore how family businesses are dealt with during divorce proceedings, examining key considerations and steps involved.

Identifying the Nature of the Business

Before delving into the specifics of handling a family business in divorce, it’s crucial to determine the nature of the business itself. Is it a capital asset, or is it primarily a source of income? Several factors help make this distinction:

  1. Solo Operation: If the business relies solely on one person’s efforts, selling it may be challenging due to the intimate connection between the individual and the business’s goodwill.
  2. Capital Assets: Assess whether the business holds capital assets, as their valuation becomes essential.
  3. Turnover: The business’s turnover plays a role; higher turnovers often necessitate a thorough valuation.

Matrimonial Asset Determination

Once the nature of the business is understood, the next step is determining if it qualifies as a matrimonial asset. If the business was acquired during the marriage or cohabitation period, it is considered a matrimonial asset, provided it is owned by one or both spouses. If it was owned before the marriage, the advice is required as to whether this is a matrimonial asset or not.  If multiple owners are involved, a valuation of the spouse’s shareholding becomes imperative.

Valuation Process

Choosing an impartial entity for business valuation is crucial. An independent accountant is typically preferred, with a joint letter of instruction being sent by both spouses’ solicitors. The letter provides a historical overview, necessary documentation, and a list of pertinent questions. Key questions include:

  1. Valuation Methods: Accountants often present multiple valuation methods, recommending the most suitable one.
  2. Liquidity Assessment: Examining the business’s liquidity to determine the feasibility of extracting funds.
  3. Discount/Uplift Considerations: Evaluating discounts or uplifts based on shareholding percentages or differential roles in decision-making.
  4. Risk Assessment: Identifying potential risks associated with the business.
  5. Tax Implications: Analysing the tax implications of withdrawing funds from the business.

Court Involvement and Possible Resolutions

The court’s role in handling family businesses during divorce varies based on ownership structures. While a court can order the sale of a business or its shares, alternatives are explored to preserve income streams where possible. This may involve redistributing assets to allow one spouse to retain the business, creating a delicate balancing act between stability and risk.

Options for court orders include:

  1. Lump Sum Payment: The business owner may be ordered to pay the other spouse a lump sum.
  2. Share Transfer: Shares in the business can be transferred from one spouse to another.

How can Ridley & Hall’s Family Lawyers Help

Navigating the complexities of handling a family business in divorce requires expert legal advice. Seek guidance from one of our divorce solicitors to ensure a smooth and fair resolution.

For personalised advice on your situation, contact Vicky Medd.

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Vicky Medd – Partner & Solicitor

 

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