Anyone who owns a business knows it is almost a certainty that they will encounter tough times, whether it is because of a dip in revenue, an untimely economic recession or the loss of key staff members. Nevertheless, one of the greatest – and most surprising – challenges to a business owner, is divorce.
When falling in love with your other half and beginning a life together, divorce is not a pivotal concern or something that many people plan. Yet, with 42% of marriages now ending in divorce, it can happen to the best of us, especially if you have put in the long hours needed to build a company and taken your ‘eyes off the marital ball’.
The issue here is that, if handled poorly, divorce can result in the selling of your business as it can be a valuable marital asset to meet both parties’ needs.
A common mistake is to assume that a business counts as a detached legal entity and that it will not be touched when divorce occurs. This is not always the case. Value of shareholdings may be considered and possibly used to form part of the ‘matrimonial assets’. That means, it may be divided and distributed upon divorce, especially if the business was formed during the marriage.
It is therefore important to ensure that you recruit specialist advice on the necessary reasonable, legal and fair documentation, as well as the legal steps needed, to protect your business at the outset of marriage. Simple, diligent forward-thinking can help safeguard your business, ensuring it remains as intact as possible upon divorce.
So, what can you do to better safeguard your business?
- Contemplate shared ownership of your business with an external source – A business which is 100% spouse-owned will generally be treated like any other matrimonial asset on divorce, namely divided and shared, unless there are justifiable reasons not to. However, a business which is jointly owned with other partners or shareholders is less likely to be at risk during a divorce, as the courts will be cautious to not cause potential damage to the livelihoods of external stakeholders.
- Produce a shareholder’s or partnership agreement in case you share the business with your spouse– Such contracts clearly set out what will happen to a business if disputes or divorce occurs, helping to protect the interests of both parties. It is also possible to agree to restrictive clauses that prevent a departing spouse from setting up in direct competition, stealing clients and/or sharing confidential information.
- Invest in a good insurance policy – Invest in a whole-life insurance policy. These can be liquidated to buy a spouse out of a business if the marriage hits the rocks, giving you peace of mind and certainty of funds.
- Ensure you keep business and household expenses entirely separate– Consciously maintain proper records by carefully documenting and avoiding intermingling personal assets with business assets. Always avoid using a family home to secure borrowing within the business.
- Consider agreeing to a prenuptial or postnuptial agreement – Entered into before or during a marriage, such contracts address how marital assets, including shareholding and ringfencing assets, are dealt with and separated upon divorce. Such agreements are not enshrined in UK legislation and therefore there is no absolute guarantee of protection. However, a well drafted agreement which follows necessary guidelines is advisable. They provide peace of mind and clarity whilst helping ensure that legal costs and disagreements are kept to a bare minimum upon divorce.
Despite the prospect of divorce however, there is no doubt how invaluable a marriage – creating life your partner, starting a family together – can be for your personal happiness and professional development, too.
As a business owner you need grit, creativity and a great amount of drive and commitment, something which is often aided by a loving partner. Life can be unpredictable, but no one should use the risk of divorce as an excuse to not make the commitment to someone they love. The focus has to be on creating a happy fulfilling marriage and enjoy building a life with your partner. In doing so, you may well evade the damaging route of divorce altogether.
