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Divorce: are family businesses and copreneurs vulnerable?

View profile for Susan Howarth
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Business is booming

According to the Institute for Family Business, we have over 4.7million family-owned businesses here in the UK and with new research by cloud accounting software provider FreeAgent revealing an estimated 1.4 million of these businesses are run by couples, dubbed ‘copreneurs’, there’s no denying that family business is on the up.

But with advisory service Relate identifying long working hours as a growing source of marital discord and the National Office for Statistics estimating that 42% of marriages now end in divorce, what could this mean for the future prospects of these businesses?

 

The end of the fairytale

Going into business with your partner can be an extremely positive, rewarding and profitable experience.

The problem is, as with the ‘honeymoon period’ of any relationship, often no one wants to put a dampener on things by entertaining the possibility of it all ending.

But some relationships do break down and divorce can happen – and when it does, it can be a messy, complicated and drawn-out process which is often both emotionally and financially exhausting.

Throw a business in on top of that, and all hell can break loose.

 

Equal parties, fair and square

Whether you and your ex built a business together or you collectively agreed for one of you to be breadwinner and the other to be homemaker, in the eyes of the law both parties are deemed to have made an equal contribution to the family wealth.

So, if you divorce, all business assets along with your home, car, savings, pension, property…etc. are taken into account as part of the ‘matrimonial assets’ to be divided on divorce.

Consequently, many entrepreneurs don’t realise that their partner could be entitled to a 50:50 split of the company, particularly if children are involved.

 

Fail to plan…

Without any form of legal documentation, you could be forced to buy out your business partner - but if the business doesn’t have the free capital then you could be forced to continue working together until a clean break can be afforded, the implications of which could negatively impact on employee, supplier and client relationships, and generally cause major business disruption.

Worse still, a court could end up deciding how to divide the business which, if unresolved, could then result in your business being wound up.

 

The harsh reality of divorce

None of us really know how we’ll react in the event of a relationship split until it happens, but it’s not unusual for many to feel devastated, betrayed, angry and bitter.

Such intense emotions can make it almost impossible to make practical and rational decisions, whether that be about your children, division of matrimonial assets or business decisions.

And it’s not uncommon for people to adopt underhand tactics to ensure their ex receives as little as possible - when it comes to business, people can lie in financial disclosure documents, get businesses undervalued, hide or gift assets, sell assets undervalue or delay account preparation.

 

Be prepared

It may feel unromantic, but the perfect time to discuss, agree and formalise what will happen to your business and its assets in the event of a split is when your relationship is in a great place, and those discussions can be had without heat or charged emotion.

Much like business continuity planning, it’s a sensible business decision to set up a Partnership or Shareholder’s Agreement.

This will help you clearly set out the terms and conditions of the business relationship and what happens in the instance of a separation. This can include roles and responsibilities, percentage of ownership and distribution of profits and losses, how the business would be valued and share purchase/sales plans if one of you leaves, restrictive covenants…etc.

 

Pre-nups

It’s also a wise move to put in place a pre-nup which will details assets each party wants to ring-fence for themselves should the relationship break down, rather than these being regarded as joint matrimonial assets.

This can be particularly important in the case of 2nd marriages, when each party often brings greater wealth and assets into the relationship.

Although prenups aren’t legally binding in England, Wales and Northern Ireland, a landmark ruling in 2010 significantly changed that and the divorce courts now DO take prenups into account.

 

LPAs

To cross the t’s and dot the i’s, you should consider putting Lasting Powers of Attorney​ in place, so you are able to choose who you would like to deal with your personal and business affairs should you become unable to do so as a result of long-term disability, illness and/or loss of mental capacity – the absence of an LPA can devastate families and destroy businesses.

 

Wills

Make sure you review your will and keep it up to date – any new agreements or amendments should be reflected in your will to ensure all your assets are handled and distributed as you’d wish in the event of your death.

 

A clear conscience

Putting such safety measures in place can save everyone a huge amount of potential future pain and heartache.

These agreements can give both you and your partner peace of mind that your business is protected, giving you a clean slate to move forwards enjoying your relationship and building your business.

 

Here to help

If you would like any help or advise in relation to Partnership/Shareholder Agreements, Prenups, LPAs or Wills, or you are in the process of divorce and you feel your business is at risk, we’re here to help.

Please contact our office on 01606 48777 or pop in to one of our FREE weekly drop-in clinics.

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