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What Happens to a Family Business When Couples Divorce?

what_happens_to_the_family_business_in_divorce_image_by_David Castillo Dominici

Many couples come into a relationship bringing with them an already established family business. Others may choose to establish a new family business and company during the relationship. Sometimes they may set up a family business as a joint enterprise.

But when relationships fail, couples are then faced with Divorce – and the inevitable division of assets. The question of what will happen to the family business venture then naturally becomes a source of huge concern.

Divorce means making decisions about asset division and income support.  You need to do this in a way which ensures proper provision for all dependent members of the family, particularly children. In considering how to deal with business assets, certain key factors are important:

1. When Was The Family Business Established?

As with all assets, it is important to establish the full history of the business. This includes the date it was established and any investments either party made into the business. The business might be older than the relationship. This can strengthen the argument that the family business owner should retain it. However, it’s not always clear cut.  You need to balance it against the overall needs of the family and any dependents. The length of the marriage itself is also relevant here.

2. What Role Does Each Spouse Have In The Family Business?

Regardless of when the business was established, if your spouse became involved in running it, this will influence the division. Involvement includes day to day running of the enterprise, paid or not, or financial investment. One partner may have given up work to support a family, enabling the other to successfully progress in the business.  This may be taken into account as a ‘valuable contribution’.

Involvement in the business can also take the form of direct legal involvement such as a Directorship or Shareholding. This is common in limited companies. This adds a layer of complexity to progressing a Divorce case. Each party must be mindful also of their company law obligations towards each other and to any shareholders. So tread carefully.

3. Is The Family Business a Valuable Asset in Itself?

Sometimes you can’t separate the value of the business with the individual trader, particularly in the case of sole traders. However, you need to remember that there may be a “goodwill value” in such cases. Limited companies on the other hand are easier to value, together with shareholdings of such companies if applicable. It is best to obtain formal valuations in either case.  You need to factor the value of the business  into the overall division of the family asset base.  Other assets may include more straightforward property assets.

4. Is The Family Business The Main Source of Income?

When dealing with a Divorce particularly in the case of a dependent spouse and/or children, then maintenance and financial provision is a key factor.  So, you need to consider whether this will impact on the income stream of the family. You need to do this before deciding whether to sell or alter the family business structure in any way. In many cases, you can preserve the company – without any negative affect – to secure income and maintenance for children or a dependent spouse. To do this, one party may have to relinquish in full their interest in the family business. Alternatively, they can maintain an interest until a future date when financial maintenance may no longer be as relevant.

5. What If The Business Is Run From The Family Home?

This does not normally arise with large scale companies, or long-established family businesses. However, many small professional businesses or trade businesses, can operate from the family home. An office location can be within the family home.  The business may use an outside workshop or section of the garden with buildings. Small creches or playschools, for example, may use buildings adjacent to the family home.

Or a family home may be central to an agricultural farmland. In these circumstances, you need to give careful weight to the impact upon the business of relocation. It may be preferable that the person responsible for the business therefore remains in the family home. This has a knock-on effect, not only on the division of the business asset. It also affects decisions about the family home, and the accommodation needs of the party leaving.

 

These are just a few examples of the complexities of owning a family business and going through the Divorce process. In many cases, it is best for couples to consider some form of Pre-Nuptial Agreement before marriage. This is particularly important if one or both own long-established businesses and/or farms before they marry. Pre-Nuptial Agreements are not binding in Irish Law. But they are a factor which Judges must be consider in a future Divorce application.

Couples who reach agreement outside of Court may find more solutions and flexibility open to them. This includes options like Collaborative Family Law and Mediation. Orders which Judges make in contested proceedings are blunt and rigid. They do not allow the same degree of flexibility as an agreement between the couple. Therefore, as with all Separation and Divorce cases, it is important to focus minds upon agreement rather than conflict.

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