DIVORCE AND THE FAMILY BUSINESS

20th July 2020

 

DIVORCE AND THE FAMILY BUSINESS

Divorce can be a very distressing time even for the most steadfast of people. It can really knock you off your guard and at unexpected times.

Divorce can mean lots of changes. Changes to where you live, changes to how much time you spend with your children, and sometimes changes to your business. For many business owners your business is your extra child. You have created it, nurtured it, and and watched it grow. You are rightly proud of it, and also very protective of it. Unravelling marital assets on divorce can easily descend into acrimony when you cannot agree the level of entitlement, especially in relation to your business.

The law considers the business a joint asset for the purposes of divorce but you may not agree, especially when your ex hasn’t worked and often taken little or no interest in the business. Yet all of a sudden she is entitled to and wants 50% of it. Where is the fairness in that you plead?

The best advice I can give you is to protect your business BEFORE marriage. However, I know this in unpalatable for many business owners as you tell me pre-nuptial agreements (pre-nups) are unromantic and, in any case, you don’t need one because your spouse would never make a claim against it… this invariably turns out not to be the case and business owners are shocked to learn this once their ex has got themselves a lawyer.

For many business owners this advice comes too late. However, the next best thing would be to have a post-nuptial agreement (post-nup) to protect your business as part succession planning and wealth management.

A pre-nup and post-nup can be varied as often as you consider necessary. For instance, if your spouse takes an active role and makes a substantial contribution to helping you grow the business. Having a pre or post-nup can provide you with some degree of clarity of what each of your intentions are towards the business.

To the horror of most business owners, the family business is not untouchable by the court in divorce proceedings. The courts primary concern is ensuring the needs of both you and your soon-to-be ex are met.

In my experience, it would be fair to say that the court will not order a sale of the family business UNLESS there is no other viable solution. Yes, the court will take into consideration any third party shareholders but, irrespective of these, the court's primary concern is the financial needs of both you and your ex and your children.

In some circumstances, compensation may be awarded if your ex sacrificed their own career and earning capacity to care for your children and support you in the business behind the scenes. Ultimately the court's objective is to divide all the marital assets fairly between you. Unfortunately, there is no legal definition of fairness and what you consider fair may be, and is likely to be, different to what your ex and possibly the Judge considers is fair.

For the avoidance of doubt, martial assets include business interests developed during the marriage or growth in value of a pre-marital existing business and also assets held in trust.

The family court has a wide range of powers and in any decisions involving a family business takes into consideration various factors such as how long the business has been trading, financial viability, and liquidation, as well as the extent the parties rely on the business as a source of income.

The court may also take into account whether the business existed pre-marriage and, if so and provided needs of the other non-business owner can be met from other resources, could allow for some part of the business value to be ring fenced for the business owner.

My advice is always to try and broker your own deal, through your solicitor, rather than have the court impose an order as your deal is more likely to be less harmful to your business and more likely to preserve both the future of the business and its earning capacity. Having a lawyer who knows how business works in real terms is highly advantageous. Not only will they be familiar with business accounts but also how businesses work in practical terms.

It is always wise to get specific advice on your situation as it is not a case of one size fits all, and by taking early action you may be able to influence the outcome in relation to your business.

If you need any advice on how to protect your business before, during, or after marriage, please get in touch with me on Sarah@lifeschapters.co.uk

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