What happens to the family business upon divorce?

Separation and/or divorce are never easy but can be even more complex when one or both of the parties own a family business.

There are approximately 4.8 million family-owned businesses in the UK. Accordingly, many separating couples require to consider what happens to the family business when facing separation and/or divorce. We are here to give some insight into how family businesses are treated in this situation.

Family Businesses and Divorce

Firstly, you should be aware of the general reference made to businesses (or interests in businesses). In Scotland, there are many forms which a family business could take. For example, the business could be set up and run as a company, with you and/or your spouse owning shares in that company (be that private or public), as well as possibly being directors of that company.

Or, it could be that one or the other of you is a sole trader or perhaps you and/or your spouse are a partner or partners in either a general partnership or limited liability partnership (LLP). The structure of the business,  the interest that you hold in it as well as the documents that regulate the business will be of vital importance to how the business is valued and dealt with on divorce.

Matrimonial Property

The value of the family business will normally only be taken into account in a divorce (or dissolution of a civil partnership) where the company, or partnerships, is classed as ‘matrimonial property’.

Generally, a business will be classed as ‘matrimonial property’ where it was set up or bought after the parties were married or became civil partners. Therefore, if you, or your spouse, bought or set up, a business prior to the date of marriage and neither the ownership nor its structure, has changed, then it would not normally be classed as matrimonial property. However, if the ownership and/or structure of the business has changed during the course of the marriage then it could mean that the business is now viewed as ‘matrimonial property’.

Additionally, where your business is a sole trader or a partnership, any increase in the value of your cash reserves within the business whilst married might also be classed as matrimonial property – even if the business was acquired prior to the date of marriage. There are always exceptions to the rules!

Fair Division

Any business interest which falls within the definition of matrimonial property would require to be valued and taken into account in coming to a ‘fair division of the matrimonial property’.

Now, whilst this may sound like an issue – it does not necessarily need to cause any great concern. A ‘fair division’ can (and usually is) achieved without affecting the operations of the family business.

Retention Of Business

When negotiating a fair division of matrimonial property, it may be possible for you to retain your interest and/or control in the business so long as the overall asset division between you and your spouse, which includes the value of the business, is fair.  In practice, Scottish Courts are often reluctant to transfer shares of the business to a spouse who had no prior involvement in the running of the business.

Further, from our experience, Scottish Courts would be unlikely to force a spouse to sell their business, or do something which detrimentally affects its value, or puts it at (or its workforce) at risk. The court can order payment to your spouse by way of instalments if resources are stretched. But, if the business-owning spouse is not able to offset the value of their business against the other assets, then, in theory, the Court may order the business to be sold to fund an equalising payment.

A Complicated Situation

As will be clear, the situation is complicated and so it is always best to get legal advice at the earliest opportunity in order to provide the utmost protection to you and your business.

Here at BTO, the Family Team are happy to provide you with advice and can work closely with our corporate team to ensure the best possible outcome for you and your business.