The Importance of Family Businesses in Ireland
As we all know, family businesses are the lifeblood of the Irish economy. Some people have spent their life building this business and it represents more than just the income derived from it. It can have huge emotional significance. This is further multiplied when the business has been handed down through generations and/or is owned by siblings. As a result, when a marriage breaks down, and one spouse has a share or total ownership of a family business, this can be a big complicating factor in deciding how to distribute the assets of the couple during divorce.
The Complexity of Legal Advice with cases like these:
Even though a person may visit their solicitor for “family law” advice, that solicitor will in fact be using all their wider experience of law such as company law, shareholders rights, land law, pensions, etc. It is quite a complex area to advise upon and this article will hopefully touch upon some of the issues faced in this area.
To provide clarity in the area, I thought it would be helpful to look at the numbers. There are approximately 300,000 of these small to medium businesses in Ireland. Of this number, 91% of them are what would be termed small enterprises ie they employ less than 9 people. The rest employ up to 250 people. On a general level, enterprises like this are nearly always limited companies. Their structure is governed by their constitution (memo and articles of association) and shareholder’s agreements.
Valuing a Family Business in Divorce
Of the 91% of businesses we would call small businesses, the real question is whether the entity has any actual enterprise value. An awful lot of self-employed people’s businesses are pretty similar to Jobs and should be treated accordingly. When I encounter these types of businesses, I realise that there will be more of an effort to accurately say what the real income is from this business but I will also quickly conclude that the business has no enterprise value. No one would buy this business as it is wholly reliant on the business owner. So in essence for the vast majority of small businesses, the only relevance of the business will be the income that the owner derives from it. As I said earlier, there will be more careful vetting of the accounts of the business than simply looking at a P60 for an employed worker. Everyone is pretty familiar with the benefits that business owners can gain from their business above and beyond the salary they are paid. So how do the divorce courts look at bigger family businesses?
Before making any steps, the family’s marital assets need to be valued. In every divorce case, this means, pension statements are obtained, the property is valued and in the same vein, the business is valued. This is usually performed by a forensic accountant. On a side note, valuing a business is not as simple as valuing a house. One cannot just look at the property price register and myhome.ie and look for comparisons. The valuation of a business can often seem more like art than science. There is no company register of prices of small businesses that sell. Instead, the forensic accountant looks at the finances and mainly the income and revenue of the business. They assess the profitability, the type of work the company does, the location, and the assets owned. There are in general different multiples of profits that companies are bought for depending on the type of business. For example, restaurants don’t usually sell for very much whereas software business can be very expensive.
Importantly, the structure of the business and if there are other shareholders and the relevant agreements will also influence the valuation. Of course in these situations, both parties will be obtaining a valuation but both will be seeking opposite goals (one will want it to be worth more than the other).
So once the business is valued, and all the other assets in the marital pot is valued, the key mantra to remember (and which you will hear from your solicitor and barrister repeatedly) is the court shall ensure that such provision as the court considers proper having regard to the circumstances exists or will be made for the spouses and any dependent member of the family concerned. So obviously the business may be just one of many assets a couple has. The court (and the couple’s legal advisors) must decide how to divide those assets based on that mantra. So what percentage if any of the family business should be included in the family pot? In classic lawyer speak, this depends on a number of non-exhaustive factors.
Look at the history of the family business. When was it started? If the business was started before the couple married, then this would be an argument for the business being outside the scope of the divorce. Is it an inherited family business? In a general sense, inheritances are not seen as the fruit of the marriage. The history would also include the finances used to start the business. Perhaps the couple obtained a loan which they both paid back at the start of the business. What was the couple’s role in the business? Did one person have a nominal role as director or company secretary? Did one spouse contribute by working in the home which allowed the other spouse to concentrate on developing the business? In certain circumstances, a pre-nuptial agreement exists which is not binding in Ireland but can be used by the courts in assessing the couple’s intentions. In my experience, they are not very common in Ireland.
When ultimately deciding, a dominant factor that the courts will consider is that the court will be reluctant to disrupt a viable business as it will most likely be the main income provider for providing for the couple and children. In other words, the court is primarily concerned with income provision for a dependent spouse and/or children. They will be slow to order the sale of a family business when the business is the main source of income. Fortunately, this is not the court’s (or their advisor’s) only choice.
Possible Outcomes for the Family Business in a Divorce
Sometimes one party will buy out the other spouse’s acquired share in the business. Another way of achieving this is where one party offsets their share of the family business for a bigger slice of another family asset i.e. family home, or pension. More unusual would be where the couple continues to co-own and operate the business. This would generally not be advisable from a family law or commercial viewpoint. Unfortunately, where perhaps the business is not the only income-generating asset, a decision will be made that the business needs to be sold in order that both spouses can move on with their lives.
The Importance of Compromise and Mediation in Divorce
In all divorce cases, agreement on a compromise is always best. This is especially true in cases where a family business is one of the main assets. Parties should engage in mediation and any alternative dispute resolution procedure or collaborative family law as an alternative to having the court decide. This is because the court can only make very blunt orders and cannot arrive at any creative solutions to arrive at a compromise whereas all creative options are open to be agreed in a negotiation. All that matters is that both spouses can live with the compromise. No one is going to get everything they want.
My final thoughts on family businesses in this case, is that the spouses compromise most divorce cases before going into court. This is the desire for all family law cases as when the lawyers have all been paid, the couple still usually have to interact and live with the result of the divorce for the rest of their lives. This is why I would suggest that if your marriage has ended (especially if you or your spouse are involved in a family business) you engage an experienced family law solicitor to advocate on your behalf. They will navigate the complexities involved in this type of case on your behalf and obtain a good outcome for you and your dependents.
