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CLIENT ADVISORIES

Mar 7

DIVORCE AND THE FAMILY BUSINESS.

In the Cayman Islands, it is not uncommon for married couples to have a business together. Sometimes they are equal partners in the business, both bringing different skills. One party might be the ‘rainmaker’ and the inspiration behind the business, and the other party may have a lesser role.

There are many examples of couples using their different skills together to run a successful business, which will need to be considered upon divorce.

No matter what the arrangement is between a couple, if they agree that their marriage is over and decide to progress divorce proceedings, both parties will usually be worried about what will happen to the family business and their jobs within it, especially when the business has historically funded the family’s lifestyle.

To assist a divorcing couple to fairly divide business assets, the Grand Court of the Cayman Islands will often order a valuation of the business or businesses.

How will the business be valued and who will keep the business?

It is important for the parties to jointly instruct an expert accountant to value a business. To ensure fairness, the expert’s primary duty is to the court, and not to the parties who instruct them.

A selection of accountants will usually be contacted by the parties and their attorneys. This will help find the best expert for the job and to obtain the expert’s time and costs estimates.

How will the business be valued?

The instructed expert accountant will usually consider one of three methods to value the business. The first and probably most common valuation is based on the capitalized earnings of the business. The expert will assess and calculate the future earnings which the business can sustain for the foreseeable future and multiply it by a factor, to represent the future earnings a third-party purchaser of the business might acquire. The parties will then have an accurate estimated business valuation to work with.

The second method is a net assets valuation. Basically, this is a valuation of the business assets and stock, less any liabilities.

The third method is the dividend yield method, which is more uncommon, and used to value minority shareholdings in a business. This is not usually relevant for family businesses.

The methodology the expert will use will depend on the nature of the business. The expert will usually value a business based on what a willing third-party buyer is prepared to pay for that business as a going concern. However, in most divorces, a sale of the business will not be appropriate because the income that the parties are accustomed to will be wiped out with a sale. The separated family will have to fund their lifestyle, which will often come from the business. Therefore, it is important to obtain the best advice when considering the division of business assets.

Who will keep the business?

Under Cayman Islands divorce law, a judge can order one party to transfer their shareholding in a business to the other party. A judge can also make an order to sell a business. However, this does not happen very often, for the reasons described above and because the separated family will usually require an income.

Although this article describes how the court may deal with a business, most divorcing couples reach a financial agreement by consent, with the assistance of legal advice and/ or mediation.

In some cases, the parties may decide to run the business together following their divorce. This is not uncommon and usually happens when the parties each have equally important jobs in the business and taking either of them out of the business would be detrimental. Furthermore, this method usually guarantees that each party will maintain the income they received during the marriage.

In the event that both parties have important jobs in the business, but one or both does not want to remain in business with the other, one party will often purchase the other spouse’s interest in the business. This is where the business valuation is key. The net value of the company, along with the other matrimonial assets, will then need to be divided fairly between the parties.

The income that the party retaining the business will receive going forward, compared to the earning capacity of the party leaving the business, is usually an issue that will need to be considered. It is often the case that the earning capacity of the party leaving the business will be considerably less than the salary and dividends that they received from the business. This indifference will have to be factored into the divorce settlement and may mean that the party who retains the business will have to pay a term of spousal maintenance to the leaving party, to ensure that they can meet their needs. This is just one example of a particular situation, every divorce is different with its own unique issues, and it is why expert advice is important.

If you are a business owner and you are experiencing problems in your marriage, it is important that you seek advice from an attorney who is experienced in dealing with businesses within divorce proceedings.

You can contact our experienced family law team at McGrath Tonner through Helen Lakeman on hlakeman@mcgrathtonner.com.

Our family team

  • David McGrath
  • Sara Ismail
  • Jonathan Casey
  • Gregory Burke
  • Angelique McLoughlin