Preservation of Family Business

22 September 2022
2 minutes
Family Law

Divorce and the division of marital assets to provide for two households is one of the biggest threats to a family business. In order to avoid “killing the goose which lays the golden egg” it is important to preserve a family business to allow it to continue operating as opposed to forcing a fire sale; a forced sale is usually not in either spouses best interests.

This protection does require an in-depth legal understanding of how businesses works, the options open to a Court in dealing with business interests and an immediate recognition that a number of other external advisors will be required. Those advisors will include tax and pension experts and accountants to ultimately value the business.

There are several available options to spouses to avoid irreparable damage to a family business owned by either spouse or both. This involves an element of forward planning either pre-marriage or post-marriage. The options are as follows:

  1. A pre-nuptial agreement. This is a legal document entered into before marriage which addresses how assets are to be divided in the event of divorce. It is not binding on our Courts but has evolved in case law to a position whereby “a Court should give effect to a pre-nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement” [Radmacher -v- Granatino (2010) Supreme Court decision]. A pre-nuptial agreement could provide for the business to be retained by one spouse and a structure put in place for compensating the other spouse, taking into account tax implications, minority share interests and the valuation of the business.
  1. Post-nuptial agreement is a legally binding document and can be made a Rule of Court and enforceable on the presentation of a Divorce Petition by either spouse. It should be entered into freely and with each party having the benefit of independent legal advice. A valuation of the business and tax advice should be obtained by both spouses through their separate legal advisors. A cost-effective approach is for a single instructed forensic accountant to be appointed to carry out a valuation of the business and who is ultimately answerable to a Court. The report would take into account how the non-business spouse or spouse with no shareholding in the business is compensated for the loss of their benefit. It would also examine how funding could be extracted from the business or another marital asset in the most cost-effective way possible.

MKB Law’s Family Law department has the necessary depth of expertise and experience to advise business owners as to individual entitlements on the breakdown of the marriage. Careful planning is needed to allow the business to continue operating and to accommodate succession planning for future generations. If you would like to discuss any of the points mentioned in this article, please feel free to contact the Family law team at MKB Law.

This article is for general guidance only and should not be regarded as a substitute for professional legal advice.

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