Divorce and your business

As a successful business owner, when you build a business, you no doubt will build into it a plan for dealing with contingencies.

In particular you would make sure that you could not be bought out at disadvantageous terms, that you cannot be forced to withdraw large sums of money that will affect the running of your business and you would make sure that there are no circumstances under which you would have to part with a substantial shareholding to a third party.

All of these can happen on divorce or relationship breakdown particularly if you have not planned ahead, you need to establish an exit strategy and a valuation process for the assets. If you do not do so there may be a conflict between company law and family law, which have different considerations.

If you are in a relationship but not married you should consider:

  • a cohabitation or living together agreement
  • terms upon which you buy a property together
  • whether buying property in your sole name prevents a claim being made
  • the consequences of having a joint business
  • Do you have a common law husband/wife?
  • Should you leave a Will?
  • What happens to your pension/insurances / death in service benefits?
  • What is a parental responsibility agreement?
  • Can you be made to provide accommodation for any children?
  • Does it make any difference that you were engaged?

Whilst no one who gets married does so thinking about the financial consequences of divorce, there are circumstances where it is sensible to do exactly that. If you are married you should consider ring fencing any pensions, whether to transfer shareholdings / enter into a shareholders agreement, whether to enter into a partnership agreement bearing in mind the benefits and drawbacks of employing a spouse in a business. You should also consider inheritance tax planning, Wills and protecting your children’s interests.

When making any decision a court will look at the totality of the assets of the marriage and can make the following orders:

  • maintenance for children (by agreement only)
  • spousal maintenance
  • lump sums
  • transfer of property
  • pension sharing/offsetting

If those assets include business interests, the value of those interests will have to be agreed or determined before the court can make an order. There is no fixed method for valuing business interests and experts may well disagree, not only as to the method of valuation to be used but also as to the factors to be taken into account and the impact of those factors on the valuation of the business. As a result you may find yourself embroiled in an expensive and uncertain valuation process before you begin to apportion any assets.

You can protect your interests with a shareholders agreement or partnership deed which can stipulate the method by which the business is to be valued and the factors to be taken into account (or ignored) in determining the value of the business and also how payment is to be made. This can reduce disagreement and so save time and cost in the court proceedings and help ensure that your business is not overvalued.

Whilst there have been legal developments which may separate pre and post marriage wealth, none of this is guaranteed and it is all a matter of discretion for the courts.   If you have an existing business prior to getting married you may wish to consider a Pre-Nuptial Agreement to protect your interests.

If you are considering divorce you should take the time to consider:

  1. will you have to sell the business?
  2. my spouse is a director/employee – can you sack them?
  3. how can you raise funds to buy out your spouse’s interest?
  4. what are the tax consequences?
  5. what will be the effect on your other partners / directors / shareholders?
  6. how will it affect the liquidity of any business?
  7. who can buy the shares?
  8. how will it impact on minority shareholders/quasi partners?
  9. what information you have to disclose?
  10. how will your pension be dealt with?

There is no way to “divorce proof” assets but there are ways to mitigate what could be a financial minefield for your business.