Divorce or separation - protecting the family business

 Matrimonial or other family or personal divorce or separation can be a terrible experience.  Where the family partners are in business together an added layer of complexity exists.  What follows are a number of questions and comments to assist your analysis of the situation.  Ultimately it’s best to reach agreement with your partner rather than have a solution imposed by court order.

Is the business of central importance to the family going forward, or is it a sideline or secondary source of income? The less significant the business is as a joint asset the easier it may be to resolve any difficulties.

Do both parties have an ownership stake in the business, or is it only one?

Which of the following options most closely describes the extent of your wish to participate on the business in the future?

• a strong wish to participate.
• would like to retain some management involvement.
• would like to retain a financial stake only and remain a passive investor.
• want to exit permanently.

Could the partners continue to work in the same business during and following the split or divorce if this was essential or if they wished to?

Do you have a contract of employment; does your contract of employment contain non-compete clauses outlining what work you can and cannot do after your employment in the business is terminated? If so this document must be factored in to any settlement of terms.

What sort of stake is it; shares in a limited company or a share in a partnership or limited liability partnership?

Is there a written shareholders’ or partnership agreement or memorandum; are there any other promises or understandings not written down? Don’t worry too much if nothing is written down because background law deals comprehensively with these sort of relationships to the extent not governed by written documents.

What day to day roles does each partner have in the business; could the business continue if one of the partners ceased to work in it; could the skill set be employed to replace a departing partner?

How wholly or largely dependent is the business on the efforts of one of the family partners?

If the business is the income provider for the family it is important that the partner on which the success of the business depends remains positive about his or her continued responsibility for the business and not allow the business to dwindle and die: no court can make and order for someone to work. 

Are there are other important employees, ie a layer of management, other family members working in the business?  If so particular dependence on a separating family member may be less acute; in addition the business is less likely to be disrupted while the slit or divorce is being implemented.

 Where did the original funds come from to set up the family business? How has each spouse contributed to the establishment and growth of the business?

In the event of a short period of marriage the relative size and length and timing of the contribution from each of the partners can be a crucial determinant of the ultimate split of the business. All forms of contribution should be considered, not only capital contributions and time spent at the office but also contributions in providing support and encouragement to the establishment and growth of the business. 

Are there any other substantial investors in the business?

It is vital to identify third party (ie other than the family) interests in the business. Have options been granted to members of staff or does a business angel have a minority interest? If third parties have an interest in the business this will affect the options available to you in dealing with your current participation in the business.

Are there any standalone elements of the business or can the business only operate as one trading unit?

If the business needs to be split up it is important to understand whether there are distinct parts to the business. This will determine whether a split of the business could be possible whereby each partner can participate in different elements of the business as an owner or as a shareholder.

Does the business have significant bank borrowing and how would you describe the relationship of the business with its bank?

The level of bank involvement may limit the options available to you. It is important to consider at what point third parties may wish to or be able to intervene to protect their interests. 

Are you a party to any document, such as a bank guarantee or lease from which you should seek release if not continuing in the business?

What is the nature of the business; which of the descriptions below are most applicable to the business?

• low growth/stable
• cash generative
• cash hungry
• high growth/high risk
• mainly tangible assets (e.g. buildings, plant, machinery)
• mainly intangible assets (e.g. brands, intellectual property)

The nature and type of the business that you are involved in will impact on the ability to value the business accurately and the risks you will take in retaining or disposing of your interest. A business goes through financial cycles over a number of years. At the top of the cycle a business is reaching its full potential both in terms of profit margins and value.

How would you describe the current position of your business in the financial cycle?

• top
• middle
• bottom

The valuation of a business at the top and bottom of its financial cycle can vary enormously.

Would now be a good or bad time to realise your investment in the business, if so can the partners agree to sell the business, and to the terms; and does the expected duration of the sale process fit in with the other aspects of the split or divorce; and can the business be tidied up (pre packaged) and well run in the meantime given the unstable family background?  If it would be propitious to wait before attempting to sell it will be important for neither partner to force a premature sale if at all possible.

 If the business were sold as a whole, which of the following opportunities for exit may be available?

• the business would be attractive as a trade sale to competitors.
• the business would be attractive to a potential venture capitalist.

Would one of the partners be able to buy out the other; ie raise the money with or without financial backing? If this looks to be a possibility the partners should endeavour to agree on an identity of independent valuer and get the business valued on the basis of a sale of the whole business in the market conditions prevailing on the date of the valuation.

How often do you review the desirability of adopting or revising a shareholders agreement and or special articles of association?

Even if no divorce or split is in contemplation you should think through the importance of the business to yourself and family and a regular basis, say every 18 months, and if becoming important arrange for formal agreements to be drawn up.  These agreements can provide a mechanism for one party to buy out the other in given circumstances, perhaps to the higher bidding family partner, in stated circumstances, for example ceasing to live together for a period in excess of six months.  Whilst the court will be free to make any orders it wishes it will be influenced by any existing agreements concerning the business.

Again, while you may be very happy in marriage or family partnership you may find business disagreements arise, perhaps as to strategy, expansion, consolidation, funding, which any business might face and which may be insurmountable.  A pre agreed contractual exit procedure would assist.

Again, irrespective of marriage or family partnership, all sorts of business risks and events may occur and it is important to have a shareholders agreement or special articles of association in place as an aid to stability, recovery and continuity.