Protecting your company (during and after divorce)

A divorcing couple need to come to an arrangement on the division of matrimonial assets in a way that is fair but that ensures both parties are provided for. This can be particularly complicated where there is a business involved. There are various issues to consider in these circumstances to ensure the best outcome for both the parties as well as the business itself. 

How can I protect my business?

When determining how the assets of a marriage are to be shared, the needs of each party will be examined together with determining how these can be met. This involves sharing of assets, but that does not mean they will be split exactly in half and there are various factors that the courts will consider when determining who will gain what asset. 

A business that is owned by one or both of the parties will be considered together with all other assets and liabilities in the matrimonial pot. Generally, the courts will try to avoid ordering the sale of the business, particularly where there are other employees that have to be considered. It is more likely that they will try to determine how one party can retain the business with the other party having their interest in the business offset by other assets or resources.  

There are various things that can be done to protect a business, both in advance of a divorce as well as during and after proceedings:

Pre/post-nuptial agreement

Pre and post-nuptial agreements will be considered by the courts in England and Wales so long as they have been correctly drawn up. These can detail the couple’s intentions as to what happens to the business if they were to separate. It is generally easier to have these difficult conversations while relations are amicable than to try to resolve them once you have decided to separate. These agreements can help a party that commenced the business pre-marriage to protect their interest if the couple separated in the future.

Keep business assets separate

Even where a business was started by one of the parties pre-marriage, if the couple has used shared funds or borrowed money together to support the business, it will be harder to show that the business should not be regarded as a matrimonial asset. 

Sacrifice other matrimonial assets

Where one party wishes to retain the business (often the founder) and the other has a purely financial interest, then it may be possible for the former to gain sole ownership of the business and the latter to gain other matrimonial assets as compensation. This can be the family home or it could be a regular maintenance payment from the other spouse. 

What should you avoid doing?

There are various decisions that a couple can make in relation to a business that could be detrimental if they decide to divorce in the future. Although these are not fatal, it is always best to consider the implications of any decision in advance to ensure that it is the best option in the particular circumstances. 

Spouse is a Director or Shareholder

If one party set up the business and then employs their spouse or gives them shares within the business, this can make matters very complicated in the event of divorce. Buying out the other party can be very expensive and there may not be enough capital to do this. It also may not be possible to transfer shares between parties. If the spouse is employed by the business, then this can be incredibly difficult where emotions are running high due to the divorce and the parties cannot work together amicably (but the spouse cannot be sacked due to potential employment claims). Employment of the spouse could provide evidence of how vital they were to the business and could also undermine a pre or post-nuptial agreement. 

Securing business debts against matrimonial assets

Any business debts secured against other matrimonial assets, such as the family home, will complicate matters and make it harder to agree a settlement in the event of divorce. It also makes it a lot more likely that the spouse will argue the business needs to be considered as part of the matrimonial assets.

Business valuation for divorce

Ensuring a current and accurate valuation of a business is vital. There are various methods that can be used for the valuation of a business during divorce and it is very important to make sure the right one is used. It is fairly normal to instruct a forensic accountant and other joint experts to ensure there is a complete independent review of the business in order for the parties to negotiate a financial settlement. 

The valuation will examine the whole business and determine:

• The way that the business is structured including any parent business.
• If assets or funds can be removed from the business without causing issues for its future viability.
• The tax liabilities for the business as well as relevant individuals.
• The history of the business including when it was formed and by whom. Businesses formed pre-marriage will be examined to see how much they evolved after the marriage.
• Relevant shareholder arrangements including details of ownership and whether shares can be transferred.