Divorce and Business Ownership: How to Protect Your Business Against the Threats of a Divorce
Updated: Sep 16, 2019
According to research, approximately 1.4 million business in the UK are currently run by couples – a number that continues to rise. When business owners decide that their marriage has reached a point at which reconciliation is no longer an option, divorce difficulties can create all kinds of problems during what is already a very stressful, challenging process. When it comes to divorce and business ownership, it therefore pays to know how to protect your business against the threats of a divorce.
Divorce and Business Ownership
Many business owners are unaware that even if their spouses were never involved in their company’s daily activities, they could well be entitled to a share of the business. The likelihood of a situation like this arising grows with the number of years a couple has been married and/or any inequality in terms of financial resources.
For a court in the UK to consider ‘fair’ division of assets, everything will be ‘lumped’ together - with little distinction between assets being made – unless legal documentation proving a different position can be provided.
From this, a court may decide that the only reasonable approach to dividing assets is to either break up or sell the business. This, of course, can be extremely disappointing if you have invested significant amounts of time & money into building your company & its reputation.
Owning a Business and Divorce Processes
Dealing with a business during divorce proceedings frequently raises a multitude of complex issues, including its valuation, financial contributions and dividend payments; inheritance wishes and interests or shares of other members of the family.
Family courts try to protect family businesses from becoming too involved in divorces to prevent them having to be sold off or broken up to raise adequate funds to pay court determined settlements.
One available option is for one divorcing spouse to buy the other one out (assuming they have shares in the business) or liquidate assets, which will achieve an equivalent outcome. Potentially both time-consuming and messy, this can have a negative impact on a business’ performance.
Alternatively, couples can explore offsetting, a process where one spouse is given a greater share of other available assets to protect the business.
Many companies have neither the assets to liquidate nor the spare capital to help bring about a clean break. The resulting pressure to sell typically signals the business’ end – which is something courts may consider.
It is also quite common for newly divorced couples having to carry on working together until the company is sold. This creates an entirely new set of challenges – to obtain the best possible sale price, the couple must successfully work and make mutually beneficial decisions together.
Whether a business is valued as part of divorce proceedings or not depends on whether its value if sold would be substantial.
If a business is deemed to be of no real value, it may therefore not be included. A successful family business, however, will be considered (and subsequently valued during the process) an asset pertaining to the divorce.
Different business types will, of course, be subject to a unique valuation process of their own. Partnerships are simply income streams, and when there are neither assets to sell within a business nor underlying capital, only the stream counts – and this may have a bearing on maintenance issues.
If the business is owned outright by one spouse, an in-depth process of valuation will be necessary. At this point, obtaining advice on what steps to take next from an experienced family lawyer is highly recommended.
Where valuation of a business is important, the valuation will be undertaken on behalf of both spouses by an expert accountant (a so-called single joint expert). Rather than all divorces having a single, set procedure to follow, matrimonial judges may, if deemed necessary, obtain and consider a spectrum of values. To achieve a desired outcome (depending on whether retaining the business is aimed for or not), it is therefore crucial to engage an experienced accountant.
Company Shares and Divorce Settlements
Regardless of how much or how little a husband or wife may be involved in a company’s’ daily running, they may own shares in the business, which is often done for tax purposes.
Such shares can also be considered and work towards divorce settlements, with shares being transferred from one spouse to the other as part of finalising an agreement.
The single joint expert’s role is to value the shareholdings of both spouses, and matrimonial courts also have the authority to transfer shares in the event of one party not agreeing to earlier negotiations.
If such issues are encountered by a family-run business, recruiting the assistance of a team of experienced solicitors is therefore critical.
Protecting Your Business with Prenuptial Agreements
Requiring foresight from the start to draft the appropriate documentation, prenuptial agreements – or prenups’ for short - are the first step towards protecting a business in case of a divorce. Not particularly romantic and often seen as overly cautious and pessimistic, prenups may be a tricky topic to bring up but they are a must for any business.
A type of written contract, prenups typically list all property (including debts) owned by each partner and specify each partner’s property rights in the event of the marriage coming to an end.
Contrary to common belief, prenups are not merely for the wealthy and - used to protect couples’ assets – can help divorce proceedings to run smoothly, without unnecessary disputes or arguments.
These prenup contracts can also help spouses protect themselves from one another’s debts, clarifying each spouse’s financial responsibilities and rights during the marriage and preventing either one of them suffering unfair financial backlash after settlement of the divorce.
Without such a prenup agreement, who owns a property and what happens to the family business must be decided by the court – which can, of course, create significant tension between all involved parties.
It may be an awkward mater to discuss but getting together with an experienced family lawyer team to draw up a valid prenup will give you the peace of mind of knowing that your business is protected if your marriage should ever come under threat.
Other Measures of Protection
A formal document typically drawn up in the UK in the shape of a shareholders’ agreement, a so-called “founder’s agreement” is another good starting point. Formally setting out how a business’ founders intend to operate it, this type of agreement avoid any future misunderstandings or disputes that could otherwise threaten the business.
It is important to remember that any agreement, be it a prenup or a founder’s agreement, is not merely about the owners’ relationship but about the business’ future, its reputation and the lives of its employees; its investors and even its clients/customers.
The time to realise your business was not set up with all the right agreements is not when your divorce lawyers are preparing for its sale (i.e. getting it valued). This will be an emotional time – preparing in advance and ensuring everybody is aware of what’s at stake will make for a much smother, more amicable divorce.
There is a diversity of options that can & should be explored – everyone of which can help to prevent serious financial repercussions and allow both spouses to quickly move on without lengthy court battles over how assets should be divided.
Summary of Key Points
- ‘Good’ divorces invariably rely on cooperation between diverse professionals
- Divorces quite often create pressure to sell a business
- Businesses can be protected with prenuptial agreements
Whether your marriage is long and strong, or tensions are starting to build, now may be a good time to speak to a family lawyer to better understand your position. Leaving emotion aside, they can call in the services of an extensive array of specialist lawyers able to both advise and help protect your business.
Whether you own all, none or part of a business, knowing where your future steps should take you makes knowing first where you are right now a must – so why not get in touch with a member of our team right now.
Please note we are unable to offer legal aid.