What Happens to a Private Business in a Divorce?

Calculating business cost

Divorce can be as damaging to a business as it can to an individual.

When a business owner gets divorced, the commercial considerations can be as serious as the personal ones, making a stressful situation even worse.

It is a well-known axiom that divorce is one of the five toughest and most stressful experiences a person can have. For a business owner, where there is less of a divide between personal and working life, the stresses can be doubled.

The business itself will be subject to the same level of scrutiny as every other asset.  How much is it worth? How much income does it generate? The business will probably be valued, and that process in itself can cause months of negotiation and debate.

Whichever side of the coin you are on, it is essential to take advice from a top law firm at the earliest opportunity so that you can make the running and have some control over the direction the case takes. Otherwise, you will be constantly defending and countering moves from the other side.

Advance planning

Is there anything you can do in advance to ensure your business is protected in the event of divorce?

If you are already separated or contemplating divorce, the answer is probably “no” as the court would view any movement of assets or shareholdings at this point as a ruse to avoid future claims on divorce. This would be seen in a very dim light.

If, on the other hand you are not considering divorce but simply looking at future worst case scenarios, then there are some steps that can be considered:

  • A pre- (or post-) nuptial agreement can be as helpful for a business as it can with any other asset.
  • Keep business assets separate from personal assets as much as possible. For example, avoid using the matrimonial home to secure loans for the business.
  • Do not just involve a spouse in the business for the sake of doing so (e.g. as a director) or for tax relief purposes. It strengthens their case of having some right to the business assets.
  • Consider sharing ownership with an external party. If the business is 100% owned by one spouse, then the courts will treat it like any other asset. But if there are other owners involved, the court is less likely to advocate any action that could harm the other partners or shareholders.

Negotiation

There comes a point when faced with a claim against the business, where a decision has to be made. To fight, negotiate or pay up? As with any negotiation, in divorce or otherwise, it is vital to have a clear and unemotional plan at the outset. You need to understand the implications of taking it to court. How will the process unfold, what are the likely costs and what are the probabilities of the different outcomes?

Again, you need to work closely with your solicitor to understand what is best for you, your business and ultimately, your spouse too.

The decision you take will depend on your own circumstances, but court action can be very costly, so you should think hard what you can do to avoid legal action.

Specifically, consider the following questions:

  • Are you prepared to share ownership of the business, and to what extent?
  • Are you prepared to divide the income from the business, and to what extent?
  • What are your plans for the business when you retire? If you plan to sell the business, perhaps you could give a percentage of the proceeds at that point?
  • If you have children, what role might they play in the future of the business?

Finally

While everybody’s circumstances are different, there are two golden rules that apply to all.

The first is to make sure you have a good solicitor – you will have a professional ally at the most difficult time. The second is to take control – doing nothing will just invite others to set the agenda.

Megan Bennie is a solicitor at Grayfords, a London law firm that specialises in English and International family law.

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