Protecting Generational Wealth: Family Businesses and Divorce

Resolution of spouses’ financial claims within divorce are usually based on need achieved by dividing assets. If assets are owned by one or both spouses and are being sold or transferred, this can usually achieve a clean break. But, what if there is a behemoth asset such as a family business? A family business passing through the generations can rarely be casually offloaded. Divorce risks compromising the running and retention of a business. A divorcing partner, director and/or majority shareholder can find themselves subject to invasive investigations of their business interests, and, more particularly, the liquidity of that interest to satisfy financial claims. Business partners, who may also be relatives, can find that a collective business asset becomes part of someone else’s divorce.

A business interest is a class of asset that often demands interrogation in a divorce. Judges, lawyers and forensic accountants are well aware that ‘creative accounting’ can be a feature of businesses and that net book values can be years out of date. All perfectly legitimate, but also not reflective of a true value in today’s market. A divorce court can direct business valuations that will revalue assets at actual market value, appoint a forensic neutral to pick through financial transactions, and there will be particular focus on what can be financially extracted to share with a spouse, or to boost the shareholder’s own assets. There is, in turn, the risk of a business destabilising to satisfy a spouse’s marital claims, which claims are themselves no less legitimate. So what to do to guard against, or minimise the risks of, interference?

For those seeking protection and willing and able to take preventative action, regularising what could happen in the event of a divorce is the first line of defence. For a generational business owner looking to confer interests to successive family members, insistence on a pre-nuptial or post-nuptial agreement for the recipient, ideally before transfer, is wise. This can require, nay compel, the recipient to ring fence their actual or pending business interests within a pre- or post-nuptial agreement in an effort to have them left out of a subsequent divorce. Within such agreements, both spouses would be required to recognise that the business assets are (those invaluable words) ‘non-matrimonial’. Without this layer of protection, the business interests are squarely ‘matrimonial’ and caught within the marital asset base.

If trouble is brewing, a concerned business owner may take early advice from their corporate lawyer and accountant about whether there is protection in reclassifying shares, or, introducing, or amending, a shareholders’ or partnership agreement. This could, in the right circumstances, preserve business interests and see a director, partner or majority shareholder through a divorce with minimised impact. A non-divorcing business owner can sometimes do little more than watch from the side-lines with gritted teeth. A pre-emptive reorganisation may make everyone feel more secure until the divorcing business partner is in calmer waters. This particularly so if there is a solid paper trail of a business need to re-evaluate and re-organise at that time.

For a divorcing couple who do not want to carve up a business and who, ideally, hope to continue running it or working in it together, documented management parameters are essential. In businesses involving couples, there is often a lack of documented clarity on key issues, which is rarely problematic in a stable relationship. By divorcing, however, the business arrangement between the owners becomes fractionally more distant and unknown elements can creep in, like new partners. There is suddenly a new prospect of, say, a random third party inheriting a shareholding if a business owner unexpectedly dies. With adequate aforethought, these scenarios can be avoided. An original or revised shareholders’ or partnership agreement can be beneficial to set agreed parameters for ‘what if?’ scenarios. Open and honest dialogue between the couple and their matrimonial, corporate and accounting advisors will lay invaluable groundwork to manage the business constructively into the future for the next generation.

Georgina Rayment

Prettys Solicitors LLP

27 April 2023