Have you secured your ‘business pre-nup’? Read here how to protect your business should the worse happen when you are in business with your spouse...
It is proven that divorce enquiries in the UK jump in January, rising by as much as 300 per cent. With January 2017 upon us, divorce lawyers up and down the country will be bracing themselves for their busiest time of year.
“Divorce January” may sound like a bad joke, but the reality is year after year there is a seasonal spike in the number of divorce cases around this time.
You might imagine that lawyers are gleefully rubbing our hands at the prospect in a rise in broken marriages.
While every law firm in the country is different, the idea of taking pleasure at someone else’s misfortune is abhorrent, and it’s certainly not most commercial lawyers approach and certainly not ours.
It’s important to approach any marital legal dispute case with empathy and, where possible, try to help couples avoid the courts altogether, act swiftly and cost effectively .
Of course, this isn’t always possible and divorce can be a tricky business – especially when children are involved. Throw a business into the mix and things can get even more complex and, in our experience, sometimes down right dirty.
When it comes to a divorce many entrepreneurs (men and women) often don’t realise that their partner may be entitled to a share in their company – even if you built the business through all your sweat and tears they haven’t been involved at all. The longer you are in your marriage or the financial resource disparity, the more likely this becomes.
To briefly summarise in the UK if you have no legal documentation all your assets go into a pool and the court considers a “fair” division.
Equal division is frequently the starting point for family proceedings, and unless you can prove otherwise on why that is unfair you may be backed into a situation where you have to buy out your business partner if they have a share in the company or liquidate assets to pay them a court ordered sum. Many businesses don’t have the spare capital for this, and it could be the beginning of the end for the venture.
More broadly, if you own your business jointly with your spouse, all business decisions must be made jointly unless you have agreed otherwise in writing – once your divided this may lead to a deadlock and seriously stunt growth. To recall one situation, a client had no legal documentation dealing with the operation of the business or upon separation, and so the 50 per cent default position arose personally and in business.
The business could not afford to buy the partner out. They were forced to work alongside each other for 18 months before they could afford a clean break. This caused friction, staff issues, disruption and impacted the business terribly.
What can you do to protect your business from a divorce?
The obvious answer is get some documentation in place – at the very least a founder’s business agreement or an agreement between you personally . This doesn’t sound romantic and some people see the “pre-nup” conversation as the first nail in the coffin of their marriage, but it's a must in business.
As awkward as it might be to bring this up with your spouse, consider that your business isn’t just about the both of you. It’s about your staff, your investors, business partners, clients and customers.
If your divorce destroys a company that many other people depend on then the consequences could be far reaching. So if it’s not too late, get something drafted. A founder’s agreement should at the very least:
- Transfer all IP to the company
- Set out what happens in the event of a dissolution or dispute
- Agree restrictive covenants to refrain the departing spouse stealing clients or setting up in direct competition or sharing confidential information
- Specify who owns what shares and make clear any monies put in by each of you. Keep good accounting records to formally log all sums paid in and withdrawn so its transparent and no one can hide anything during the proceedings if the worse happens
If you can get a pre or post-nuptial agreement to compliment the agreement which can be very persuasive during divorce proceedings if each party has independent legal advice on it.
Make sure that your Wills mirror this too, in the case of your death it governs where your shares or their cash value go and how this will be distributed.
What happens when you don’t have your house in order?
Over the years I’ve seen some pretty questionable tactics from business owners trying to protect their businesses. From hiding assets to selling them at an undervalue and delaying account preparation – when backed into a corner, business owners will pull out every trick in the book to protect their business.
Sometimes they will even gift away assets or sell at an undervalue ahead of anticipated divorce – this is often to spite the other party and reduce the overall value and share.
While the family court can put injunctions in place or reverse transactions, it is costly and emotionally destructive for you at an already distressing time.
So, in short, if you haven’t prepared things properly your business is vulnerable from a divorce. Of course, none of us want to imagine our marriage will break down – it supposed to be a bond for life, until death do us part.
Bringing in lawyers can feel like the antithesis of this and many avoid it because they fear it will cause arguments, tension or at worse a rupture.
But divorces do happen, and while it’s much easier to put your head in the sand, crack on and avoid a potential argument with your spouse, the consequences of not having something in place are far reaching. Beyond the impact a broken business will have and you and your family, think about your staff and customers.
Good advice to any married entrepreneur should be to be brave, puff your chest out, have the chat, get things documented and get on with running your business.
Karen Holden is the founder of A City Law Firm