According to a study by Harvard Business School, family businesses account for two-thirds of businesses across the world with around 30% of these being passed on to a second generation. As such, if you have a family business, it is not uncommon for a child of the family to be working within the business in the hope that one day it will be passed on to them.
If you do run a family business and have questions about business succession the following is a short guide below from our Family Law team.
Avoiding future disputes
If you are considering transferring an interest in a family business you will be anxious to safeguard it from competitors or changes in the economy. However, you may not have considered protecting the family business if you intend to pass it to a son or daughter.
It is likely that you have spent decades building up the business and therefore, it is unlikely that you will want your son or daughter’s spouse to have a financial interest or influence in the business.
So what happens in the event of a breakdown of a marriage following transfer of an interest in a family business?
The overriding objective on division of matrimonial assets is always to satisfy financial needs and achieve fairness.
Anyone going through a divorce who has a financial interest in a family business will have to disclose them as part of the financial disclosure process. Such interest will be treated as a ‘matrimonial asset’ within divorce proceedings and will be taken into consideration by the court when determining the division of assets.
The starting point for the distribution of matrimonial assets – including any interest in a family business – very much depends on factors outlined in Section 25 of the Matrimonial Causes Act 1973. Considerations include the length of the marriage and the needs of each party and any children who are dependents.
What would happen next?
The timing of the transfer is important. If an interest is transferred to your son or daughter many years prior to the breakdown of their marriage, a Judge is more likely to consider them as shared marital assets. However, if the interest is transferred shortly before separation it may be treated differently providing:
- It is fair to do so, and
- The divorcing parties ‘needs’ are met.
What actions can be taken to protect a family business?
Consider pre-nuptial / post-nuptial agreements:
Although the courts in England and Wales are not obliged to take pre-nuptial/ post-nuptial agreements into consideration they can be very influential. As such, documents of this type are likely to be taken into consideration particularly if drafted correctly and both parties have sought independent legal advice.
Therefore, before transferring a business interest to a child of the family you may wish to encourage them to enter into either a pre-nuptial / post-nuptial agreement.
Do you have an existing Will which protect your personal assets? Firstly is it up to date and secondly does it also protect your business assets as well? The last point is one which few people consider – the legal protection that should be put in place should anything unexpected happen. In this situation, a ‘Business Will’ is one which protects both personal and business assets and makes it clear what would happen if you were unexpectedly out of the business (long-term illness, for example).
Whatever your situation, help is available to legally protect you and your business.
Get in touch with our team:
For a free discussion about your situation – including transferring an interest in a family business and how division of matrimonial assets would work in the event of a separation or divorce, please email our Family Law team by email.
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