Parting ways with a partner is rarely an easy process. There are emotions to consider as well as the dividing of assets and family commitments. But what do you need to consider if you are a business owner protecting a business during divorce?
Unfortunately, many business owners are unaware that their spouse could be entitled to a share in their company – even if they have never been involved in the business. The prospect of this situation becomes more likely with the length of marriage.
In the UK, for a court to ‘fairly’ divide all your assets, everything is usually considered in one lump, with very little distinguishing one asset from the next. That’s unless you have the appropriate legal documentation (see below on agreements) to prove otherwise.
The court could decide that the only way to fairly divide assets is to either sell or dismantle the business. Either way, it’s not the outcome most business owners want.
So, how do you go about protecting a business during divorce?
Dealing with a family business during divorce requires careful handling. Much depends on your circumstances and the structure of your business. You’ll need to consider its value, any financial contributions that have been made, dividend payments, financial interests or shares of other family members, amongst many other things.
It might be that either yourself or your partner may have to buy the other one out of the business if they have shares or liquidate assets. This can be complex, lengthy and highly disruptive to a business.
Many businesses do not have the required amount of capital or assets to liquidate. Depending on your assets, offsetting might be a suitable option. This is where one of you receives a higher share of one of your other assets (for example, savings) to avoid any disruption to the business. But first, both parties will need to know the value of the business.
How the value of a business is determined
Whether your business will be considered an asset within the divorce will largely depend on its value should it be sold.
If following valuation, it is found to have no real value it may not be included in the divorce. However, most successful family-run businesses are considered an asset.
The valuation process will vary from business to business. For example, if there is no capital value or no valuable assets that could be sold, then it might just be the income stream that needs to be considered as part of the divorce process.
It’s worth remembering though, if one spouse owns a business outright, an in-depth valuation will be necessary. An expert accountant, known as a single joint expert, will be instructed to carry out a valuation on behalf of both parties.
Of course, every business situation is different. If you are concerned about valuation, it’s best to speak to an experienced family lawyer who will advise you.
Consider a founder’s agreement
It’s common practice for a husband or wife to own shares in a company, especially for tax purposes, but it can make the business more vulnerable during divorce.
If a spouse has been involved in the day-to-day activities of the business (in any capacity), they could make a claim for the contribution towards its success.
Before co-owning your business with your spouse, you could consider setting up a shareholder/partnership agreement from the outset. This agreement details how the founders and shareholders of a business are going to operate to avoid any disputes that could threaten the business.
Crucially, the agreement would set out what would happen to your business if a dispute or divorce was to occur.
Protect your business with prenups
Whilst not the easiest subject to broach as you start to plan married life together, a prenuptial agreement could protect your business in the event of divorce.
Often referred to as a ‘prenup’, the contract clearly lists all the property each person owns. Most importantly, it identifies each person’s property rights should the marriage end.
Whilst prenups are not yet officially recognised by UK legislation, they can be hugely beneficial during divorce proceedings. Over the last few years, Courts in England and Wales have started to take these into account and these agreements can successfully limit claims against a business.
It may be tricky to discuss but designing a valid prenup with the help of an experienced family law team will give you some reassurance should your marriage come to an end.
Whether your relationship is in a good position, or things are becoming strained, you might want to have a chat with a family lawyer. They will give you some practical advice on how you can protect your business.