Divorce and your business: Steps to protect your assets

Getting divorced is almost always a stressful experience. – Relationships end, arguments ensue, assets get divided up, and there can be the welfare of children to think about.  Now add to that the thought that your livelihood is threatened too.  This is the situation business owners can face when they consider divorce.

Will their ex-partner get half the business? Will the business have to be sold? What if you both work in the business?  Will we all lose our livelihoods? What will be left as an inheritance for my children?

These are the kind of stressful questions we are here to answer - and help resolve for you.

Sally Powell, partner in the Tees Family law team, considers the challenges and sets out what can be done. As a business owner planning to divorce, you have options.  It’s vital that you get specialist legal advice to make sure you choose the right route to go down.

• How are assets divided in divorce? 
• Divorce and business valuation
• The history of the business
• The people running the business
• The vision for the business
• Succession planning
• Farming businesses
• Is going to court inevitable?
• Protect your business in advance

How are assets divided in divorce?

In a divorce, the first challenge is establishing each party's needs and how they can be met. Consideration is also given to the principle of sharing and dividing assets in an objectively fair way—but that does not necessarily mean equal.

The courts have a very wide discretion to reallocate assets within a marriage. If one of you owns a business, that business's assets (or liabilities) will be considered when assessing the ‘pot’ that will be distributed between you.

The Impact of Divorce on Different Business Structures

The impact of divorce on a business can vary depending on its structure.

Limited companies vs. sole traders: If you are a sole trader, your business assets and liabilities are considered personal assets and may be subject to division during a divorce. This means that your spouse could potentially claim a share of your business. On the other hand, limited companies are separate legal entities, and your spouse is less likely to have a claim on the business itself. However, they may still be entitled to a share of any dividends or salary you receive from the company. So, is a limited company protected from divorce? The answer can be complex and depends on various factors.  Tees specialist solicitors understand the complexities of business structures and can help protect your interests during a divorce.

Partnerships and family-owned businesses: Divorce can have significant implications for partnerships and family-owned businesses. In a partnership, your spouse may become entitled to a share of the business unless a prenuptial or postnuptial agreement specifically addresses the business. Family-owned businesses can also face challenges, as the division of assets may require valuing the business and negotiating how to divide its value.

In general, the court will try not to order the sale of a business if one of the parties is against this. Instead, the outcome is more likely to be that the business is retained by offsetting against other resources or there is a series of ongoing payments funded by the business profits. This arrangement tends to work well when one person is only interested in the business for the money it generates, not for the business itself. This has the benefit of keeping the business going for the future.

Call our specialist solicitors on 0808 231 1320

Divorce and business valuation

Valuing the business is often the first step which gives vital clarity.  A valuation can also report on business debts and liabilities, as well as cash flow and liquidity. Take care to consult a legal team that has access to business legal expertise, as well as family law expertise. 

It will of course help if you have kept accurate financial records and have avoided mixing business and family funds together, to understand the valuation of the business and how it operates.    There are occasions of course where business and family funds are mixed – which potentially makes the task harder, but not impossible.

It’s important you don’t attempt to move money out of the business if you think you might be headed for divorce.  The courts require full financial disclosure as they strive towards a fair resolution and if you’re caught having done this, it will not do you any good in the eyes of the court.

The valuation process should identify:

• the business structure – a partnership, limited liability partnership or company, or are you a sole trader?
• whether it’s possible to take funds out of the business without damaging its future prospects
• information about the shareholdings arrangements: who has shares, to what value and what are the relative percentage shares that people own, and are they family members?
• the tax liabilities – both for individuals and the tax that the business itself owes
• Is there a parent company, with additional companies with value (or debts and liabilities) to consider?

The history of the business 

It’s important to gather evidence to establish how and when the business began and who has contributed what to its development.  This is because the respective roles of both parties in the development of the business over time will impact the negotiations when it comes to deciding who gets what.

When did it start trading? Has it been in the wider family for many years? Or was it built up by one or both of you during the marriage, or started by one of you before you married?

The people running the business

You need to establish the facts around the running of the business.  This is also important if you don’t plan to sell the business, but it will provide income going forwards to the person who doesn’t keep the business. You need to clarify:

• who is pivotal to the running of the business? Who are the other key players?
• are any of them family members?
• does the business employ your partner?  This can be tempting for tax reasons, but it could allow them to claim a bigger share, claiming they have contributed more than they may have actually done
• are there adult children involved in the business?
• does anyone in the family live on the business premises?
• is the business run from the family home?

The vision for the business

If the business has significant value and the plan is not to sell it, the two parties to the divorce may need to discuss whether there are sufficient other assets in the marriage (such as property or investments) to ‘offset’ the value of the business by giving one party more non-business assets to allow the other party to continue the business.

It might be intended that the business is sold at some point in the future, for example at the point of retirement, in which case a balance in a settlement could be finalised at a future date.

Succession planning

If you put in place clear plans for your children to inherit the business and be involved in its running, this can help sway the court that selling it to release funds, is not in the adult children’s interests.

Farming businesses

When the business is a farming business, things can be even more intertwined because the family home is often standing on the land and farming is an all-encompassing way of life. At Tees, our heritage and culture has been rooted in the local farming community in the East of England for well over one hundred years. Find out how we can help you protect your farming business from divorce. 

Is going to court inevitable?

No. Going to court is the last resort and should be avoided where possible by engaging in non-court dispute resolution wherever possible. The courts are placing more and more emphasis on non-court dispute resolution as a means of solving disputes because of the significant delays and expense that come with court proceedings.

You should therefore first consider mediation, collaboration and arbitration as alternatives to court proceedings, to try and get matters resolved as efficiently, cost-effectively and amicably as possible.

Protect your business in advance

By taking professional advice and taking time to plan, you can put in place measures to create a structured settlement to protect the business. If you are thinking ahead you should consider a prenuptial agreement (or post-nuptial agreement if already married) as this is another effective legal device for protecting assets, such as businesses, for the long-term