Protecting the family business in cases of separation and divorce

A relationship breakdown is difficult at the best of times, but what if there is also a business involved? Sarah Liddiard and Laura Martin-Read from Machins Solicitors explain…

According to the Office for National Statistics, 41 per cent of marriages will end in divorce.

Frequently, one or both partners will have an interest in a business. Divorce or separation can prove challenging if so.

With many business owners following the advice of their accountants to use their spouse’s unused tax allowances, it’s commonplace to find the spouse (or even an unmarried cohabiting partner) of an entrepreneur made a director and/or shareholder in a family company or made a partner in a partnership business.

But the implications of doing this, especially at a time of separation, can have time-consuming and costly consequences. It’s important that business owners take steps to fully protect their business and take early advice to consider how best to protect both their personal and business interests.

What is a ‘family business’?

A family business is usually one where the original founder remains in the business, or their family or children continue to run it. It is usually a business in which one or more family members play an active role in managing it.

Where a divorcing spouse has a stake in the business, it will be considered as part of the division or marital assets. If the family business is owned by other family members, parents or siblings for example, it won’t usually form part of the marital assets for division.

Mixing family and business – the implications

If the business owners are married, the implications can be significant. The family business can be considered a matrimonial asset, regardless of who owns it and regardless of who is running it. This may mean your spouse is entitled to a share in the business on divorce.

On a divorce, any business in which a party has an interest will therefore need to be valued, initially by the business accountant, but potentially by an independent expert if there is a dispute over the valuation. A spouse’s interest, such as holding shares, being a director or being a partner in a partnership, can give them additional leverage in settlement negotiations, or lead to protracted discussions.

The spouse’s ongoing position in the business can be a cause of dispute around the time of separation and, in some cases, this can even lead to financial implication for the business. There is a risk of the business being deadlocked and unable to properly trade if parties are unable to work together or agree business decisions.

The appointment of an unmarried cohabiting partner as a director and/or shareholder in a family company can also have unexpected consequences on a separation, especially if the intention was to do so for income tax purposes only.

It may be difficult to regain control of your business from your ex-partner if you have given them an interest and there may be tax consequences of them leaving.

Getting early advice – preventing an escalating dispute

Setting out clear intentions about the family business and what may happen to it in the event of a divorce or separation can be a good idea. You may need advice on:

• A pre-nuptial agreement if you are planning to get married.

• A post-nuptial agreement if you are already married but setting up a new business or thinking of bringing your spouse on board. A postnuptial agreement is similar to a pre-nuptial agreement but entered into post marriage.

• A cohabitation agreement if you’re unmarried but living together. This may be helpful to clearly define the parameters of your financial relationship, including the business.

Seek legal advice on Partnership Agreements and Shareholder Agreements that can include specific clauses in the event of a relationship breakdown, or Service Agreements to define employment duties if your spouse or partner becomes employed in the business. Employment law experts can advise on the complexities of a partner’s employment in the family business on separation.

Together, you will be able to collaborate on a bespoke solution to cover all eventualities.

Machins Solicitors are an all-service law firm offering legal services to business and individual clients.

For further information visit www.machins.co.uk

SA Law strengthens corporate and commercial team

St Albans and London-based law firm SA Law has welcomed corporate and commercial lawyer Nikki Petken as a partner.

Nikki originally joined the firm in 2007 as a trainee solicitor. Since qualifying at SA Law, she has amassed a wealth of experience, working for organisations such as the BBC, Elysium Healthcare, and more recently, Gravity Media Group as their General Counsel. In this role she established the group’s legal function and held ultimate responsibility for legal affairs globally.

She will bring a unique blend of in-house commercial strategy and legal expertise to SA Law, with a strong track record in strategic legal leadership and adeptness in crisis management, making her a trusted partner for clients navigating complex business challenges.

In particular, she will be offering valuable advice on business growth and restructuring to SA Law’s clients, while effectively managing their cost, risk and compliance concerns. Her specialisms include contract drafting and negotiations, Ts&Cs, joint venture agreements, M&As, partnerships and corporate governance.

Nikki’s appointment comes as part of ambitious growth plans for the corporate and commercial team, as well as the wider firm, where there is a particular focus on expanding the support and services it provides to its client base of prestigious local businesses, as well as leading national, and international companies.

Commenting on her decision to re-join the firm, Nikki said: “I am excited to be making the transition back into private practice from in-house law and, especially, to have the opportunity to rejoin SA Law, where I started my legal career as a trainee and a newly qualified solicitor.

“SA Law’s corporate and commercial team has an excellent reputation in the market, and their holistic approach to clients’ commercial issues is what attracted me most to the role.

“Having worked in several different industries and businesses, I look forward to bringing the commercial and legal expertise I have acquired to the clients of SA Law and to working with the SA Law team.”

Vincent Billings, Head of the Corporate and Commercial Team, added: “We are very pleased to have Nikki join us. She brings with her a wealth of business and commercial experience that will prove invaluable to our commercial clients and assist with the continued growth of our Corporate and Commercial Team. Welcome back Nikki.”

Tracy Lacey-Smith, Joint Managing Partner, commented: “Nikki’s understanding of the wider implications of commercial decisions is second to none. Her 360-degree view will be of huge value to clients. Nikki is an excellent addition to the firm, and we are delighted to welcome her into the Partnership.”