Keeping It in the Family – Protecting Family Businesses Through Divorce and Succession

Business Network member Lucy Hart of Sinclair Law looks at what can happen to a family business when personal relationships change.

Family businesses form the backbone of the UK economy. Whether passed down through generations or built from scratch, they often carry emotional as well as financial significance.

But what happens when personal relationships shift, through divorce, remarriage or the next generation stepping in? Without careful planning, these changes can threaten the business’s continuity and value.

At Sinclair Law Solicitors, we regularly advise family business owners navigating the complex intersection of personal relationships and commercial success. In this article, we explore how to protect your family business against unforeseen personal circumstances and ensure a smooth transition to the next generation.

Divorce and family businesses – an overlooked risk

In family-run companies, business and personal lives are often deeply intertwined. A divorce, whether involving the business founder or a child inheriting the company, can destabilise operations and ownership.

Is the business vulnerable in a divorce?
Yes. In England and Wales, a family business is usually considered a matrimonial asset if it provided income to the family or grew in value during the marriage. This can apply whether the business is a sole trader operation, partnership or limited company.

“We often see business owners surprised to learn that their spouse may have a financial claim on a company they never actively worked in,” explains Lucy Hart, Director at Sinclair Law. “The courts will look at the broader financial picture, not just who appears on the company paperwork.”

Common challenges for family businesses

1. Family members as shareholders
   Many family businesses issue shares to children or spouses as part of succession planning or tax strategy. However, in a divorce, these shares may be treated as marital assets, even if they were never actively traded.
2. Generational handovers
   Passing a business to the next generation is already challenging. A poorly timed divorce can complicate succession or force a restructuring at a critical moment.
3. Informal arrangements
   Family businesses often run on trust. But informal deals, such as allowing a spouse to work in the business without clear terms, can backfire in legal proceedings.

How to protect a family business

1. Prenuptial and postnuptial agreements
   These agreements can specify how business assets should be treated in the event of a divorce. While not automatically binding, they are increasingly upheld by courts if they are fair and both parties received legal advice.

“Think of it as a form of insurance for the business,” says Lucy Hart. “It provides clarity, protects your legacy, and avoids conflict during already difficult times.”

2. Shareholder agreements
   A carefully drafted shareholder agreement can prevent shares being transferred to a non-family member or ex-spouse in the event of divorce or death. Clauses may include:

• Pre-emption rights to buy back shares
• Valuation mechanisms for settlement scenarios
• Restrictions on ownership outside the family

3. Family charters and governance structures
   Larger family enterprises increasingly adopt formal charters outlining the roles, responsibilities and expectations of family members in the business. These can help avoid disputes, especially when multiple generations are involved.
4. Trusts and holding structures
   In some cases, placing shares in a discretionary trust or using a holding company structure can help protect the family business from being treated as a direct personal asset in divorce proceedings. However, such strategies must be carefully planned and regularly reviewed to remain effective.

Succession planning – The overlooked side of divorce risk

Many family business owners are laser-focused on growing the company,but neglect planning for the “what-ifs.” Succession planning isn’t just about choosing the next managing director. It also means preparing for personal risks that can impact business stability, including divorce, illness or dispute among heirs.

Key succession questions to consider:

• Have your children signed prenuptial agreements?
• Are there protections in place if they divorce after becoming shareholders?
• Is the value of the business insured or safeguarded in any way?
• Are roles and responsibilities clearly defined among family members?

Proactive legal planning ensures the business not only survives transitions but thrives through them.

Our advice – Don’t wait for a crisis

Lucy Hart advises “Too often, family businesses seek advice only once problems arise. But by then, options may be limited, and emotions are running high. The best time to protect your business is before it’s needed, during growth, not conflict.”

At Sinclair Law Solicitors, we help family business owners and directors think ahead. Whether you’re preparing for succession, bringing a family member into the business, or simply want peace of mind that your legacy is protected, we offer clear, strategic legal guidance.

Conclusion

A family business is more than just a commercial entity, it’s a legacy. But that legacy can be vulnerable without the right legal protections in place. By planning early and taking a holistic view of both personal and business interests, you can ensure continuity, preserve value and avoid disruption in times of change.

For practical, tailored advice on protecting your family business from divorce and ensuring smooth succession planning, contact Sinclair Law Solicitors today.

Visit www.sinclairlaw.co.uk to learn more about our specialist family law legal services. We offer a free 30-minute initial consultation for new clients.