Divorce in the family business – and ways of dealing with it

Successful businesses navigate the choppy waters of economic storms, changes in technology, and the evolution of society and its developing needs.  Family businesses are no different.  

Multi-generational enterprises have the benefit of seeing some changes become cyclical but all family businesses, whether they are founder-led or stewarded by the next generation, have a particular additional challenge, which is the family’s own dynamic.  

Whilst it is never appealing to plan for a disaster, like planning for succession in a family business, thinking about strategies to manage a potential divorce settlement is vitally important

With family ownership, particularly where there are multiple family shareholders, there comes the influence of those shareholders’ personal relationships and a greater threat to the business in the event that one of those relationships breaks down.

A divorce in the family, whilst obviously carrying with it a huge emotional price, can also put the business as a whole at risk.  I have seen countless cases where, usually at a time they are least expecting it, a family has had to consider preparing for a liquidity event in the business in order to fund a divorce settlement.  

Often, this liquidity need comes when the business is not ready for it and when the structure works for the family but is not necessarily suitable for a third party investor or lender asked to step in to help fund a divorce settlement.

The way family law works in England and Wales means that all of the assets owned by either party to a marriage are considered by the court when working out what award should be made.  Where a family member has a significant stake in a family business and has worked hard to increase the value of the business during the course of the marriage, those shares become most vulnerable to attack.  

The options in this scenario are limited and finding a positive solution is particularly challenging.  No family member will be likely to want their soon to be ex-wife or husband continuing to hold shares in the family business and yet there will often be a reluctance to sell shares or to invite finance from third parties outside the family, whether it be borrowing secured on the shares or a private investor.  

Whilst the courts in England and Wales will typically order the transfer of shares or sale as a last resort, if it is considered that there is value in those assets that need to be shared, the court will want to find another way to meet the pay-out.  For cash-rich businesses, there may be sufficient liquidity to enable this to happen but that is rarely the case and often very careful structuring is required in order to meet the competing needs of the business and the divorce settlement.

To avoid this crisis scenario requires an element of planning.  Whilst it is never appealing to plan for a disaster, like planning for succession in a family business, thinking about strategies to manage a potential divorce settlement is vitally important.  

The best way of doing that is to encourage those shareholders getting married to have a comprehensive pre-nuptial agreement in place.  With the benefit of this agreement, clear parameters can be drawn as to what assets could be capable of being liquidated to fund a divorce settlement and what assets are intended to be kept sacrosanct.  A pre-nuptial agreement does not need to kill the romance; it is not intended to be a dress rehearsal for a divorce.  

Instead, it can be an opportunity to start to have a conversation around the values that have ensured the family’s success to date and to make sure that a careful plan is put in place to make sure that a divorce settlement does not result in a crisis for the business as well as a personal crisis for the family member concerned.

Katharine Landells is a partner in the family law practice of Withers in London