By Sam Whybrow, Financial Planner
Very few business owners or their customers will have considered the potential effect of divorce on a family business.
Rather like having children, as a business owner you will have gone into labour, given birth, nurtured and at some point be thinking about letting it go to start a new life. Human nature is such that we remember the highs and try to forget the lows. After all, who wants to dwell on painful experiences?
As financial planners we advise business owners particularly to protect:
- profits - by insuring a key person in their company
- business shareholdings
- remaining owners from unwanted business partners
- outstanding loans generated by a key person
- loved ones
The main reasons for this are to provide peace of mind so that in the event of illness or death:
- the business is financially secure
- the partners/directors’ financial share in the business is protected
- the business owner can recuperate and would not need to return to work too quickly
- customers are reassured that the business could successfully continue
- the family’s wealth, standard of living and future is financially secure
But few business owners or their customers will have considered the potential effect of divorce on a business.
Here are the thoughts of some leading solicitors.
Timothy Lucas, Bolt Burdon
“One way for business owners to protect their shares in private companies was always to use a nominee shareholder. The nominee would be the legal owner of the shares but would hold them on trust for the beneficial owner. The nominee would then have to deal with the shares as the beneficiary required. This arrangement had the benefit of being off the public record. Recent changes in the law aimed at increasing transparency have made this approach more difficult, and so some business owners may need to reconsider the way their shares are legally and/or beneficially owned.
It is not uncommon in divorce proceedings for the spouse of a company shareholder to argue that he/she is entitled to some interest in the shareholder’s shares. It is often undesirable for any shares to actually be transferred to the spouse.
One approach is for the parties is to agree that the shareholder retains ownership of the shares but pays a percentage of any dividend payments and/or the proceeds of any sale of the shares to the spouse.
Such terms require very careful negotiation by the parties to protect (amongst other things) any future shares acquired by the shareholder.”
Magnus Mill, Alexiou Fisher Philipps
“There are two key steps that all business owners should consider: a pre- or post-nuptial agreement, and a shareholder’s agreement that includes provision for a business partner getting divorced. While pre-nuptial agreements are not yet automatically binding, the law is moving in that direction and, if done properly, are likely to be taken into account on any divorce.”
A pre/post-nuptial agreement can provide for how a parties’ finances should be dealt with upon separation. I have seen unfortunate cases where parties have spent a small fortune on arguing the value of the business assets held in one or both of their names, and that’s before they’ve even started arguing how that asset should be treated on division. It is essential though, if such an agreement is going to hold water, that all proper steps are taken, including separate independent legal advice, full financial disclosure, and the agreement not being unreasonable (for which legal advice may be required).
A shareholders’ agreement between business partners can also help to protect one of the partners from the fall-out that could happen if the other partner finds himself getting a divorce – for example giving the remaining partner(s) first call on the purchase of any shares, not unlike provisions one might see for bankruptcy events.
Ultimately, no two businesses or marriages are exactly the same, but in all cases advanced planning and documentation can go a long way to protect assets in the event of a relationship breakdown. I always strongly recommend that partners (both in business and marriage) sit down and agree amicably what a fair outcome would be in the event of a problem – and then get a lawyer to set out that agreement in a binding way. Fingers crossed that agreement is never needed, but they’ll be glad it’s in that bottom drawer if disaster strikes.”
Jane McDonagh, Simons Muirhead & Burton
“During divorce, the Court will routinely require businesses and their assets to be valued as part of the process.
This can be an extremely complex, contentious and specialist exercise. Often the business is considered to be ‘the goose that lays the golden egg’; clearly then it should usually remain intact if possible, and the court would look to compensate the other spouse with a larger share of the other assets and/or maintenance.
Forward planning is key. A pre-nuptial agreement or post-nuptial agreement ring-fencing the business can be extremely useful in limiting claims against it. Third party interests in the business may also help on divorce. If the business is jointly owned with other shareholders or partners then the court is less likely to take steps which would damage the interests of the other shareholders or partners.”
It is important to recognise that divorce affects other business owners as well as family and friends. Think ahead and protect your business.
If you wish to discuss this article in further detail, please speak to your contact partner or to a member of the LFWM team on 020 7490 7766.
This article is for information only and professional advice should be taken in advance of any changes to your financial affairs. HM Revenue & Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. Tax advice and National Savings & Investments are not regulated by the Financial Conduct Authority. Lubbock Fine Wealth Management LLP is authorised and regulated by the Financial Conduct Authority.