Managing divorce within a family business

Within any family business lies the internal threat of key stakeholders turning on each other when their personal relationships falter. Relationship breakdown is rarely planned or timed to perfection.  It can clash with the launch of new product, financial restructuring or year end.
To minimise the impact on the business, independent advice should be sought at the earliest stage possible.  The individual agendas of both husband and wife will be different to that of the business and well informed parties are less likely to take disruptive pre-emptive action.  
Upon relationship breakdown, the couple will be grappling with dissolution of the marriage and possibly future arrangements for any children, as well as personal finances. This involves identifying what capital or other resources each of them has and what capital resources there are and may be in the future.  
To avoid personal problems becoming major hurdles, it is helpful to identify both key personnel to provide data to assist both parties in finding solutions without conflict of interest.  The management team will need to concentrate on the business to ensure that shareholder concerns do not flow from personal disputes.
Separating spouses need to identify what the matrimonial assets are and quickly value them. A business may not be saleable on the open market and the value may lie with the people running it.  If possible, terms and methodology of any valuation should be agreed. 
A husband and wife must disclose fully and frankly all their financial information to each other at the time of separation, including personal and business assets.  If there have been discussions with any third party which indicate market value of a business as a going concern, that must be disclosed or there is a real risk that any matrimonial deal done could be challenged later.  The sharing of data benefits both parties and minimises costs.  
Once the disclosure process is complete and a valuation of the business (both as capital and income producing asset) is agreed, a constructive discussion can take place on division of the business. It is unlikely but possible for both to continue to run the business. 
When dividing assets it is realistic to expect that, whilst the business may generate future income, the court aims to divide capital, property and businesses as early as possible to attain financial independence.  Who started the company, with what funds and who ran it will all be factors. Contributions that each party made to the business and family life will be assessed. 
If the business is to continue more focus will be on whether there is liquidity in the business. A valuation may identify that an untimely sale may kill the golden goose that lays the eggs. Outcomes tend towards each party receiving a blend of liquid and illiquid assets.  If one party keeps the business, they may be vulnerable if they have no other assets.
The court strives to make fair decisions and to divide capital to allow both parties to rehouse with income streams to meet their needs.  The lower the capital, the greater weight will be attached to arguments for need.  Whilst it might not be fair for one person to exit and take the liquid assets or those with more reliable values, the risk laden business assets may eventually allow one person a windfall.  
Supporting the couple’s personal relationship is important. By minimising conflict, a couple has a greater chance of finding constructive solutions.  Litigation is sometimes necessary but can be costly and damaging to a business.  If communication can remain intact, the impact on the business can be reduced.  Mediation and collaborative law offer some assistance and should be considered if possible.
Neither mediation nor the collaborative approach should be seen as soft options. The couple must work hard to help with information gathering and exploring options but this may cap cost, increase the pace of finding solutions, to ensure that the business, which may well be the most valuable capital or income producing asset, is preserved.
Richard Collins is a partner and family law expert at Charles Russell LLP
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