Going through a divorce is rarely easy. For many business owners, work is a reliable ‘constant’ that brings stability away from the challenges of your divorce. But what happens to the business when you divorce?
When you first set up a business it can often be in the first flush of romance – when you have just married. If you leap forward 15 or 20 years that business could have grown into something very different; and potentially very valuable. If you are a shareholder in a family run business and you are going through a divorce, you need to be braced for the fact that the business will come under some intense scrutiny and the shares in the business must be disclosed as part of the financial disclosure process.
The court is interested in whether:
- The business is an income generating stream through which one of the parties’ can meet their monthly needs and/or pay the monthly income needs of a spouse
- The court will be interested in the liquidity of the business and whether capital can be extracted. The court might also consider the value of company shares and whether this can be offset against other assets. In order to assist the court with the way it should deal with a family business, it is likely that questions will be asked such as:
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- how much are the shares worth?
- How much income can the business generate?
- Is the business maximising its income potential?
- Can capital be extracted from the business?
- What are the tax implications of selling or transferring shares or extracting capital or on generating more income?
Is there anything you can do to protect your business?
It is important you take legal advice on the breakdown of your relationship as soon as possible. It is also important for you and your chosen solicitor to understand your business from the outset to ensure you receive tailored advice to suit your individual circumstances. You may also need to obtain a report from an expert accountant to value the business. It is often the case that one particular party to the marriage wishes to retain the business and in those circumstances, it is important to make sure there are measures available to remove a spouse from the business if they are a shareholder in the business or an officer of the company. There are a number of things any business-owner can do just in case divorce becomes a reality.
- Consider a shareholders’ agreement if you intend for your spouse to own shares in the company and consider tailoring the Memorandum and Articles of Association, for your company, to set out what will happen in the event of a divorce. This is a useful document to have whatever your company structure, but it’s particularly useful if you’re in business with your spouse (or potential spouse).
- Next, you need to protect the business assets. Do not mix business assets with private assets unless it is absolutely necessary. Keeping a family business entirely independent of private wealth can be difficult but it assists if the two can be kept separate for the purposes of divorce.
- We understand it isn’t a terribly easy subject to broach when planning a wedding, but a pre-nuptial agreement (and if not a post-nuptial agreement) can make a difference during divorce proceedings. Although pre and post nuptial agreements are not legally binding in the UK; provided each party has received independent legal advice on the agreement and certain criteria are met, pre and post nuptial agreements can be helpful in demonstrating to the court your intentions for the business.
- It is good practice to consider having the contents of a pre- or post-nuptial agreement reflected in your Will.
- Sharing the ownership of a business with third parties can also help protect a business upon divorce because the court is less likely to take steps which could impact on the livelihoods of other shareholders or directors. This can, of course, create its own problems if you were ever to have a dispute with third parties involved in the business.
