How to protect your business from divorce
Being a business owner takes a lot of talent, time, money and guts. If you are one of the lucky ones who has managed to survive the initial all-encompassing phase of launch, and you are now moving towards, or perhaps comfortably in the established zone, well done.
You’ve probably called in a lot of favours along the way, relying on your family and mates, and you should now have mastered quite a few new skills. That was probably one hell of a ride, and you should rightly feel proud of yourself for getting to where you and your business now stand.
You will have no doubt made a lot of sacrifices en-route to success, and, for some small business owners, the journey takes a serious toll on their relationship. If your marriage is one of those suffering, then you need to know what your options are and whether you can do anything to protect your hard work.
With the breakdown of your relationship comes the fear that it might cause the breakdown of your business, which is why you might want to consider preventative tactics. Think of it like putting a will in place - it just makes sense.
Hopefully, if you are the preventative type, you will have agreed with your spouse or partner and both signed a pre-nuptial/post-nuptial or cohabitation agreement before you started your business, or once your business became substantial enough to warrant such action.
A nuptial agreement is done between fiancés or spouses before or after the wedding (and you can do a post-nup anytime you have a significant financial change in your life), and you set out and agree how your finances will be separated should you later divorce. A cohabitation agreement offers a similar mechanism for unmarried couples.
People don’t think it is very loving or easy to ask a partner to enter into such an agreement, as commonly it is the financially stronger partner asking their financially weaker partner to limit their potential future claims. However, they must still be deemed as ‘fair’, and the advantage to you both is that an agreement should save you both emotion, stress, time and money because, if you do later separate you should be able to swiftly and simply effect the terms of your earlier agreement and move on with your lives.
There are conditions which need to be met to make the agreements effective, and as part of that you will each need separate advice from family lawyers. But, in proportion to the asset or assets (it can deal with one specific asset or all your financial arrangements), which you are protecting, it is likely to be worth it, and it reduces the risk and roll of the dice if your relationship later breaks down.
Whilst these agreements are likely be upheld by the courts on a later breakdown of your relationship, they are not automatically binding and so you should make sure you have it done by a specialist family lawyer (not all family lawyers have the relevant expertise to do these). An entrepreneur should save the risk taking for business ideas and not the potential breakdown of a relationship.
If you missed the boat on entering into a nuptial or cohabitation agreement, and your relationship is showing signs of strain, then you cannot now do anything to prevent your business assets from being considered as part of your financial settlement.
Of course, that is apart from attempting a reconciliation and to plough your time, emotion and energy into engaging with your partner and possibly also third parties such as counsellors, therapists, or health care providers, and working on improving your relationship to avoid a separation.
What happens when the relationship breaks down?
If you agree to go your separate ways and you are unmarried, then the law treats you differently and you have no rights against your partner by virtue of your relationship. There is no such thing as a common-law spouse in England. However, you might have been part of the business, either early on or more recently and you may therefore have a claim against it. Company law will dictate what claims you each have against the business, for example, who has shares and who invested funds. You may even have employment claims to consider. It is likely to be more clear cut for an unmarried couple to unravel each other’s potential financial claims against a business.
If divorce or dissolution of your marriage or civil partnership has been decided on, then your potential financial claims against each other will automatically include all financial assets and liabilities which you hold in joint names, sole names, or in someone else’s name but in which you have an interest.
Our laws are wide and discretionary, meaning the matrimonial courts can give a spouse a share of a business, even if they are not a shareholder and have never been involved in the business. The courts can overlook the formal ownership of an asset and divide it up and distribute it as it sees fit. The leading argument for doing this is to meet the needs of each spouse with priority being given to any children of the family.
This is just a snapshot of the wide reach and capabilities of our laws and how they apply to a couple’s financial division on divorce. If you think you might be heading in this direction, or if your separation has already started then you should speak to a specialist family lawyer who has expertise in dealing with business assets, and preferably one who can also work closely with a corporate lawyer (I think it’s really helpful if they are in the same firm).
Clients with a business as part of their financial settlement need to gather their team of advisors around them, and usually quite quickly. There are many other issues which can flow from a family business forming part of a separation. Issues can include a dispute over the value of the business, and the correct method of valuation which should be applied.
Part of or all the family’s capital is likely to be tied to the business, and that capital may now be needed to fund one or both of you with a home. Restructuring to release funds, or managing a sale of the business (which may or may not be known to be in crisis), will require specialist advice during the settlement negotiations with your spouse.
There is also day to day running of the business issues, such as practically whether you and your spouse can continue to work together and go through your divorce. What impact will a sudden change of leadership or workforce have on the rest of your staff?
At the centre of your team should be you and your family lawyer. If you have successfully launched a business, then I do recommend considering a cohabitation or nuptial agreement. In the absence of that, taking advice as soon as you think your relationship might be unsteady may not only be vital to the outcome of your settlement, but will also give you some confidence by setting your expectations of what’s to come if you do separate, and the bracket within which your finances might be divided between you.