Breaking Up Is Hard (For Business Owners) To Do
When people say building a business is like having a child they are not far wrong. With a new business, you give birth to it, nurture its growth, manage risk, and delight in its achievements. Which is why, when it comes to divorce, the division of a business and its assets can lead to bitter contention.
Whether you are a high-street retailer, online artisan, or run a manufacturing plant employing hundreds of people, if your marriage breaks down, dealing with how the business will be handled in relation to the financial settlement will be a top priority.
Your first step is to contact a family law solicitor. Even if you and your spouse are communicating and feel you can reach an agreement between yourselves (which is the ideal situation), it is crucial to have independent legal advice. The decisions you make regarding the division of your business and personal assets will affect your financial future for many years. An experienced family law solicitor is likely to have seen many situations similar to yours, and can provide emotion-free, pragmatic advice.
How Business Assets are Treated Upon Divorce
Involvement in a business takes several different forms, whether you are a ‘silent’ partner, minority shareholder, freelancer, or an owner/operator of an SME.
After a long marriage, the starting point for a financial settlement is a 50/50 split. The court (assuming the matter reaches this stage – most don’t) has a duty to then consider the factors listed under section 25 of the Matrimonial Causes Act 1973. These include the income and earning capacity of each party, the needs of the children, and the standard of living enjoyed by the parties during the marriage.
Working Things Out Peacefully
Contrary to how divorce is portrayed in the media, the job of a good family solicitor is to support couples to work out their financial settlement between themselves, without having to resort or court proceedings.
To begin this process, the business and/or its assets need to be valued (the same process will need to occur with personal assets such as the family home). For some businesses, such as those in the service sector (e.g. consulting), the value of the business is not in the assets but in the invoices and goodwill.
In many cases, especially those where one spouse has little involvement in the day to day running of the business (and depending upon the particular circumstances), a division might be amicably achieved by awarding the business and its assets to the spouse who created and operates it, whilst giving the other spouse a larger share of the personal assets such as the family home, cars, and pensions.
Many couples need help working out how to divide their assets. After all, one of the most common reasons for a relationship to break down is difficulty communicating. It is a big ask, therefore, to expect a couple in the throes of divorcing to suddenly be able to work things out in a calm, open manner without help. This is where the Collaborative process/round-table negotiations and mediation can be of great benefit. Couples can rely on the support of their solicitors and a trained mediator, all of whom are committed to achieving a win-win result for the couple.
Coping if Things get Nasty when Working out how to Divide a Business and its Assets in a Divorce
If you are unable to work matters out between yourselves, having considered the options of alternative dispute resolution paths, such as fully engaging in Mediation, Collaborative law and/or Arbitration, you will need to attend a Mediation Information and Assessment Meeting (MIAM) prior to being permitted to file for court proceedings. There are some exceptions to this rule, such as cases where domestic violence has occurred.
One of the key dangers of being unable to agree on matters involving the business during a divorce is, in the case where you and your spouse are both equal shareholders, coming to a deadlock situation if a decision needs to be made such as extending a commercial lease or signing a contract. An inability to reach agreement can result in the business having to be wound-up, which can affect the lives of not only you, but any employees. This is where your solicitor can work to negotiate agreements to ensure such a situation never transpires.
To avoid any further animosity during the divorce process, keep clear financial records which detail monies coming in and out of the business. Clearly record loans and their repayments and make sure all your commercial contracts are well-drafted and robust.
Protecting your Business in case of Divorce
If you believe your marriage is in trouble, or you simply want to ensure the organisation you have put your blood, sweat, and tears into is not destroyed should your relationship not survive, consider taking the following actions to protect your enterprise:
- have a pre or post-nuptial agreement drawn up, detailing how the business (and other assets) will be treated if you and your spouse separate
- draw up a founders, shareholders, or partnership agreement (depending on the structure of your business) which states the duties and responsibilities of all parties to the agreement and how disputes should be managed
- make sure your Intellectual Property is protected and sign it over to the company rather than hold it in your name
- make sure your agreement/s include restrictive covenants to prevent your spouse from stealing clients, trade-secrets, and/or setting up in direct competition
- make appropriate provisions in your Will and keep it revised and updated to reflect any changes
Depending on its makeup and size, a business can be a considerable asset in a divorce settlement. Make sure your interests and the future interests of your company are protected by seeking expert legal and accountancy advice.
N.B. The reference throughout this article to divorce or marriage breakdown is intended to include the breakdown/dissolution of a Civil Partnership and the reference to spouse is intended to include civil partner.
Bennett Griffin are award-winning solicitors based in West Sussex with offices in central Worthing and Ferring. Our experienced and specialist solicitors offer a comprehensive service and will work with you in an honest, considered, and practical manner. Our family law team can advise and represent you in matters regarding your business in a divorce settlement. Please contact us on 01903 229 999 or by email at firstname.lastname@example.org for more information.
The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.