How do I divorce proof my business?

Jun 1, 2020

It’s a question I get asked all the time by business owners when I meet with them for the first time – more often than not, it’s the first question I am asked! Dealing with business assets on divorce can be costly, stressful and in some circumstances, force a business to break up. In this article I will explain how the courts deal with business assets on a divorce and the steps you might want to consider taking to protect your business from a future divorce.

When it comes to settling matrimonial finances, the parties are required to give one another full, frank and clear disclosure of all of their assets; including business assets. Once all the assets are identified, the next step is to try and agree the value of those assets.

The value of a business is a difficult one to establish as there are a number of ways that a business can be valued. It is common for the parties to instruct a forensic accountant to prepare an independent valuation of the business and this value is the one which is used by the parties for the purpose of negotiating a financial settlement. The accountant may suggest a number ways of valuing a business, dependent on its nature, and it is important that the right means of valuation is chosen.

After establishing the value of the business (and the other family assets) the next question is, how do you divide these assets fairly? There are a number of factors specific to the business which need to be considered here:

– Who owns the shares in the business?

– Can the shares be transferred: are there any pre-emption rights?

– Will your spouse’s shares be transferred to you?

– What are the tax implications of a transfer and how can that tax be mitigated?

– What is the liquidity in the business?

– Can the value of the business be offset against any of the other matrimonial assets?

– Is your spouse employed by the business? What will happen to their employment?

– What realistic income can you draw from your business? Is there a case for your spouse to receive spousal maintenance from you?

All of the above needs careful consideration alongside the court’s objective of achieving a fair settlement and the factors the court must also have regard to set out in statute.

It sounds complicated doesn’t it? So what steps can be taken to minimise the risk to your business?

1. You could enter into a pre-nuptial or post-nuptial agreement

Although these types of agreements are not automatically binding in in the UK, provided that the agreement meets certain criteria, there is a good chance that the terms of the agreement will be upheld.

For those business owners who have built their business before marriage, it is important to have a pre-nuptial agreement which ring-fences out the shares in your business as your separate property. If you are already married, you could enter into a post-nuptial agreement to achieve the same goal.

2. Think carefully before making your spouse/partner a shareholder

Where your spouse is a partner in the business, your divorce could become much more complex and difficult to settle, particularly if there is not enough capital in the business or from other family assets to buy out your spouses’ interest.

3. Think carefully before employing your spouse

Going through a divorce is undoubtedly a difficult and stressful time for everyone involved and particularly in the midst of the divorce, tensions can run high and relations can be fraught. This could make it impossible for your spouse to continue working in the business and terminating your spouse’s employment could open up employment claims.

Furthermore, your spouse could use the fact they were employed to support an argument that they were integral to the success of the business and so they should also receive a share of that value. Even if you have a pre/post nuptial agreement in place, by employing your spouse in the business, you could be opening yourself up to these sorts of arguments.

4. Think carefully before securing business debts against matrimonial assets

Not only does this add an additional layer of complication to the settlement on the whole but it also increases the likelihood of your spouse claiming they have an interest in the business because money from matrimonial assets have been used to support it.

5. Review company documents and take advice from a corporate/commercial lawyer

Before getting married, review your company documents such as your business’s shareholders agreement and take advice on the terms from a company/commercial lawyer about any clauses which could be included to add further layers of protection for the business.

Dealing with business assets on divorce is a complicated matter. The family team at Herrington Carmichael have significant experience in dealing with business assets on divorce and can provide clear advise and guidance on these matters and how best to protect your business. The family team also have significant experience in drafting and advising on pre/post nuptial agreements.

If you would like further information, please contact us through the enquiry form below or on 01276 686222 and ask to speak to a member of the family team.

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter. 

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