James Riby, family law specialist at Charles Russell, examines the impact of a divorce on a family business, and how negative ramifications can be mitigated.

James Riby, family law specialist at Charles Russell, examines the impact of a divorce on a family business and how negative ramifications can be mitigated.

Running any business in today’s economic climate can be stressful at the best of times: with family businesses there is usually an added level of complexity and emotion to the human relationships that must be navigated.  For many of these families and their businesses, the economic downturn may prove to be either the cause of the failure of their personal relationship, or it may prove to be the final nail in the coffin of a relationship which was already in difficulty. 

In either case the objective of one or both parties is usually that of ensuring that their personal difficulties do not “kill the goose that lays the golden egg”, whether that be the business itself or at least the business model and its goodwill and ability to make a profit.  This is also usually the objective of the family law courts if agreement cannot be reached.  However, when trust has broken down and personal matters cloud issues, this is much easier said than done.

In order for all parties to know where they stand, legal advice should be taken early on.  Commercial, partnership, company and tax law issues are likely to be involved as much as family law.  If there are other partners, shareholders or key employees, their views on how to continue will be critical.  There is no point in negotiating a carefully-planned agreed solution only to find that everyone is returned to the drawing board if a key individual has not been consulted about the outcome proposed.

Tax implications

In the context of re-arranging a business, the implications of tax advice are usually much more complicated as the availability of business tax reliefs, particularly those rolled over from past activity, should be addressed and calibrated with the tax reliefs that become available when family law rights and remedies are engaged.

There should also be a frank discussion between clients and professionals early on about which areas each professional can and cannot advise on, both in terms of expertise and professional conduct. Some professionals who know the business and family well and who have advised a client before are probably better advised to stand aside, in order to avoid potential conflicts of interest and preserve working relationships for the business in the future.

The two key issues for each party to consider early on are usually the value of the business and how it is best owned and managed in the future, when the personal relationship is over. Whether the business is going to be continued according to a management and ownership agreement, split or sold and the proceeds divided or left to one party with the other being “bought-out”, there will usually need to be some independent and professional valuation so that a sound and informed outcome can be negotiated.

Unequal claims

It is likely to be all the more essential when one party wishes to claim that they made a bigger contribution to the business, or that they alone grew the business in the period before or after the personal relationship. Such a valuation will also certainly be expected by the mediators and/or judges who preside over the form of dispute resolution which is chosen, and judges will usually impose it unless one or both parties persuades them otherwise or an agreement is reached beforehand. 

A less expensive but more difficult analysis is likely to be that of deciding and agreeing how best the business will be owned and managed in the future.  This requires frank and honest personal consideration, which will need to be explored with the other party and other key individuals in the business. It will also require careful thought about other aspects of the parties lives.  For example what are the needs of the couple going forwards in terms of income and capital? Can the couple really work together in the business in the future? Can they afford to keep the business if its income stream is not very good? Would selling it harm the only income stream for the future?

Creative solutions

If the parties have found it difficult to do this analysis themselves, mediation is often the better format in which to discuss it – and the other issues – than negotiation and discussion based solely on the format of each interested party having their own lawyer. There can be no substitute for independent and private professional advice for each party, but when it comes to exploring and negotiating resolution of the issues in dispute then mediation – and a new format called “collaborative law” – can be valuable tools to help the parties explore more creative solutions and save time and money. 

Collaborative law allows participants to explore options for settlement at a series of without-prejudice (or “off the record”) round table meetings; it and mediation can allow parties to more easily explore and discuss creative solutions to difficult problems which may work for them and their businesses, and it can protect other key players in the business from being exposed to the dispute. By contrast, the court process, with its emphasis on a more confrontational style, can be more cumbersome, time consuming and expensive, and can all too often prompt the parties to dwell on what they don’t agree on rather than starting from what they do agree on.

Direct lines of communication and the neutrality of other key players in the business are also more often preserved with mediation and collaborative law, and this will help if the parties are to continue to work together or if one of them is to retain an interest in the business even if they are no longer to be involved in the day-to-day running of it.

Always worth giving a try

Giving these forms of dispute resolution a try can be all the more worth it when parties bear in mind that if an agreement is not reached, the courts usually start from the presumption that a dynamic and lasting asset such as a business will usually have to be either sold or left with one party alone if it is to be preserved for the future, as the prospect of both parties owning and/or participating in its management successfully and without further dispute seem remote. This in turn makes the valuation exercise all the more important, and more prone to heated debate.

Whichever format for discussion is used, two key ingredients for preserving and building trust and reaching agreement are maintaining the status quo until agreement is reached and sharing financial information and granting access to it during negotiations. 

As with valuations, full and frank disclosure will certainly be expected by the mediators or lawyers who preside over and participate in the form of dispute resolution which is chosen, and it is an inter-party obligation imposed by the law in any event in a family context.  The courts will demand adherence to this obligation and they have wide powers to enforce it, and the obligation is broader and more readily enforced in the family law context than in purely civil disputes between parties who have no family relationship.  If one party is later found to have left some information undisclosed or “spun” it in a certain way, the agreement reached risks being unpicked and could plunge the business into uncertainty again.

Neither route should be seen as the soft option. The couple must work hard to gather information and approach discussions and negotiations with these key ingredients to help cap costs, find solutions quicker and ensure that the business, which may well be the most valuable asset, is preserved.