Jeffrey Nedas, head of the family law team at BDO Stoy Hayward LLP, offers advice on what to do with a business when a marriage goes sour
The Problem
Jane and Peter have been married for 12 years and have three children, aged 10, eight and six. Their profitable company, JP Caterers, owns and operates three small but stylish restaurants and an expanding catering business. A range of JP sauces is being put together and Jane is writing a second recipe book. The couple started the business together 15 years ago. As their family has expanded, Jane has spent less time in the actual businesses and has concentrated on administrative, management and marketing matters from the home office. They're now getting divorced.
The Law
Following the landmark case of White v White, the overarching financial principle is that the family's assets should be shared on a basis which reflects the respective contributions of the parties - and in assessing contributions, that of a wife as "homemaker" should be seen as no less valuable than that of a husband as "breadwinner". To decide on an appropriate percentage for each party, the court is required to test its proposed decision "against the yardstick of equity".
A number of issues will affect the court's decision, including:
- The length of the marriage, including any period of premarital cohabitation.
- The ages of any children.
- The financial position of the parties at the commencement of the relationship.
- The availability of any inherited wealth in terms of income or capital or both.
A second important principle is that where it can do so, the court will seek to achieve a "clean-break" settlement between the parties, with their children being provided for via periodical payments.
Expert Advice
It's essential not to allow the divorce tail to wag the business dog. If a successful business is the source of a family's pre-divorce lifestyle, the divorce process must not be allowed to destroy it.
The almost immediate reaction in most cases is for the parties to want to have the business valued so that a clean break can be achieved by one party buying out or compensating the other. This is not necessarily the right approach.
First, a business may be profitable and successful but, at the same time, may not be worth the sort of sum, post costs and capital gains tax - even at 10% - to enable the family's lifestyle to continue at the pre-divorce level.
Second, even if a value can be agreed it may be impossible for the party purchasing the business to fund the acquisition, especially if the former matrimonial home is passing to the other party and there are no other significant non-business assets.
Third, and perhaps practically most important, the business may well be dependent for its future success on the continued input of both parties in their respective roles.
For these reasons there's a strong argument for the income stream arising from the business to continue to be used for the family's benefit via periodical payments until, in the fullness of time, it's sold to a third party when the interests of both parties can be capitalised.
Check list
- Can the business be operated without the involvement of both parties?
- If one party is involved, can the other be confident that the business will be run in an open and honest manner?
- Can a clean break be funded either immediately or on a safe and secure deferred basis?
- How will the staff react to the divorce?
- Has an independent and commercially realistic view of how to resolve the business issues been obtained?
Beware!
- Of rushing off in opposite directions to accountants to obtain separate valuations.
- Of accumulating costs - which, inevitably, deplete the overall family pot.
Jeffrey Nedas
BDO Stoy Hayward LLP
020 7893 2497
Jeffrey.nedas@bdo.co.uk