Divorce or family disputes and the family business
22nd August 2017 by Fiona Hotston Moore
Aside from dealing with the emotional impact of divorce or family breakups, a divorce or family dispute can, in my experience, have a devastating impact on a successful family business.
Typically, the family business is the main source of income and the family home is one of the most valuable assets. Unfortunately businesses are not typically liquid assets and divorcing couples or families in dispute should seek the advice of both a specialist family lawyer and forensic accountant.
The key questions which must be considered in relation to a family business and divorce (or family dispute) are:
What is the value of the business? A valuation can be based on a number of methodologies but typically, for a family business, a forensic accountant will use an earnings based valuation adjusted for non business assets and liabilities. In a Court process the Court will typically appoint a Single Joint Expert Witness who is independent of both parties to value the business and give other guidance to the Court. Unfortunately however, a business is only worth what someone will pay for it and, as such, valuation has to be a combination of science and experience. It is a best estimate and, in my opinion, a forensic accountant is highly unlikely to come up with a figure that pleases both parties. Indeed they will probably upset both parties (and their advisers) if they get it about right!
Can the business continue after the divorce or family split? Courts will try to avoid a sale of a profitable business. If both parties have been involved in the running of the business, the advisers and family should consider who is best placed to run the business post the split or can it be divided? The advisers and court must also consider the position of any outside shareholders or business owners whose interests will differ from the couple or family.
What income can the business generate? A forensic accountant will consider the realistic maintainable future income after tax. They will also consider the tax consequences of a sale or transfer of the business and its assets.
Can surplus cash be extracted from the business to provide money for housing or a clean break settlement? The forensic accountant will look at the cash flows of the business to determine the surplus cash, if any.
Can borrowings be raised to facilitate the split without selling the business but perhaps secured on the business assets?
Is there a company pension and if so what value is in it?
Is there any concern that monies have been hidden through the family business or perhaps a group of companies (some of which may appear to be unrelated but may have benefited from the shift of profits). If such concerns exist the forensic accountant may be instructed to look at the movement of funds, drawings from the businesses and transactions between businesses.
Was the business generated by the efforts of both spouses or is it an inherited business? It can be advantageous to keep inherited business interests distinct from shared matrimonial assets.
As with all financial matters prevention is better than cure and family business owners should ensure they have obtained and regularly review the company Articles, shareholders agreements including pre-emption rights, pre nuptials agreements and wills.
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