03 September 2009
Figures from the Institute for Family Business reveal that family firms account for some 65% of the UK’s 4.5 million private sector enterprises.
An estimated nine million plus employees work in a family owned business, making it the largest single group of employees working in the private sector.
A family business can be anything from a one-man computer consultancy to a High Street giant such as Specsavers, which has an annual turnover of nearly £900 million and is still 100% owned by its two founders, who work in the business alongside their three children.
In many family businesses the shares will have been split between a husband and wife as a tax efficient option when the business was started. This does however mean that family businesses can be vulnerable if the relationship at their heart breaks down for any reason, such as divorce.
A key question we are frequently asked is "is a court likely to order the sale of my business" says Sue Andrews, partner and family law practice group leader at Thames Valley law firm B P Collins. On the basis of not "killing the golden goose" Sue says this is unlikely, but it may be that a restructuring is necessary in order that funds can be released.
Another issue often raised is where one partner considers he (or she) has made a greater contribution. For example, a husband may claim it has been his entrepreneurial flair and skill which has made the business such a great success, and that his wife's involvement has been minimal or in name only. Such skills are however likely to give a spouse a greater share only if they amount to 'genius' and where the assets are of very significant value.
Sue says: "We deal with a large number of family owned and managed businesses, and we understand how important it is to people when they have built up a successful company from the beginning, to know if their business will be secure and how it will feature in the divorce proceedings. With our experience we are well placed to help them understand their position."
It is important to first determine whether a business has a value and if so what that may be. This valuation is generally undertaken by an expert jointly instructed by both spouses, which means that the questions asked and basis of the valuation are agreed beforehand, as is the choice of valuer.
It is important to take this step, as one wife who did not recently found out to her cost, when she went to the Court of Appeal seeking to increase the amount due to her.
During their divorce proceedings her former husband, the managing director of a privately-held timber company had estimated the value of his shares in the business at £216,000, but when the company was sold a few months later, he received £1.8 million.
His wife claimed that he failed to disclose the true value of his stake in the business but the Court decided against her, emphasising that there had never been any consensus about the value of the shares.
It is also important that the spouse who wishes to retain the business "gets it right" not only in terms of value, but also as to whether he/she should bear the risk of retaining the family business, with their partner receiving a greater share of the other assets. This is particularly so given, as the current recession has highlighted, that share values can fall as well as rise. Where that occurs, the person who retained the shares/family business is likely to be held to his or her bargain, as a city fund manager recently discovered.
He unsuccessfully sought to reduce the £11m divorce settlement after shares in his investment company, which he had retained, dropped dramatically from £2.77½ to 27.5 pence a drop of 99%. The Court decided in that case, and in other cases this year, that "the natural process of price fluctuation" did not enable someone to escape from a previously agreed settlement. This was even though it was argued on his behalf that compliance with the Order would leave him in the red to the tune of around £539,000.
"These examples demonstrate just how difficult it can be where a family business is involved. Couples have to make rational decisions about a business while at the same time dealing with the trauma of the divorce itself. This is why it is so important to seek objective expert help early on," Sue points out.
If you would like to speak to one of B P Collins' experts in family law, please call 01753 279045, complete the online enquiry form or email familylaw@bpcollins.co.uk. |
