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January 2014 - Article: The Business of Separation

We all know the old fable of killing the goose that laid the golden eggs, which warns against the dangers of excessive greed. The saying was applied by one Family Law Judge in a divorce case to situations where there is a family business.

For separating couples in this situation there can be great concern, particularly for the party who is running the business. They can fear that divorce is going to spell the end of the business, and it having to be wound up or sold to release capital, or at least a severe disruption to its profitability.  However, a joint approach to the question of how to treat the business can pay dividends.

Family lawyers know that there is a great deal of uncertainty around business valuations, with two accountants often coming to very different figures as to the value of the business.  The available cash and assets in the business will need to be taken into account and usually, if the business is providing the only income for the family, it is in everyone's interest to ensure the business remains as healthy as possible. It may be that a valuation is necessary or at least an accountant's report to help a couple understand what income the business can generate and what capital, if any, can be extracted and when.

An approach that can help, pioneered by the family law group, Resolution, is the process known as collaborative law. Over 1,400 lawyers in England and Wales – all Resolution members – have already received training and can offer this option to their clients. Separating couples and their lawyers all sit down together and work things out face to face, under an agreement that the divorce won't end up in Court.

Michael and Laura* separated after a long marriage of 20 years during which time Michael had built up his own small business. "I was worried that, due to the divorce, I was going to lose everything I had worked for, for so long.  However, I knew that, at heart, Laura was a reasonable woman who understood the need to keep the business afloat to provide us both, and the children, with income in the future.  We both very much wanted to ensure that the divorce was ‘tailored’ to recognise our concerns about the business, rather than imposing a 'one size fits all' solution. We liked the idea of sitting around a table with our lawyers and working it out between us rather than risking having a judge, who might not have the time to properly understand our business, deciding things for us.

"I won't pretend that the collaborative process was always easy, and Laura and I had to have some very frank discussions about what could and could not be afforded in terms of extracting value from the business. However, we both benefitted from jointly instructing an accountant who was also trained in the collaborative process to assist with working out what was realistic in the circumstances."

As Rob Parker, collaborative lawyer at Phillips explains, ‘This is the real beauty of the collaborative process in that it offers the flexibility for couples who want to find a solution which takes account of their individual circumstances in a whole range of situations, rather than having to use the strait-jacket of the hostile court process.

It takes commitment and time, but for an ever increasing number of people it is the ideal way to manage what could otherwise be an impossible situation.’

For more information about collaborative law, contact Rob Parker on 01256 854604 or rparker@phillips-law.co.uk.

*The names of the individuals featured in this article have been changed to preserve confidentiality.