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Don’t let a divorce ruin your business

June 26, 2014

There’s no doubt that entrepreneurs need spark, grit, creativity and a huge amount of drive and commitment. However, adversity can be a helpful companion to an entrepreneur: it may be the catalyst for that light-bulb moment or it may create resilience.

As a divorce lawyer, many people often say to me that my job must be depressing because I deal with people in emotional turmoil. My answer is that helping people through the crisis is one of the main reasons why I enjoy my job so much.

However, what also gives me a buzz (apart from the lawyer stuff such as finding the hidden asset or winning a hearing) is seeing the transformation in some of my clients and, for many, seeing them go on to do something that they would otherwise never have done.

A number of my clients have gone on to create successful businesses after their divorces – something they may never have done were it not for the divorce. Divorce can be devastating but it can be inspiring, or it can remove personal constraints and, depending upon which side of the coin you are on, provide more financial independence and resources.

Entrepreneurs need to avoid a divorce becoming the kind of adversity that breaks the business. The very characteristics needed by an entrepreneur, coupled with the high demands businesses place on the lives of business owners and their family members, can put a strain on any relationship.

Funding a divorce settlement could wipe out years of hard work

If just starting out, entrepreneurs and their families can be living on loans, savings or help from family members. Financial worries and a lack of free time to spend with loved ones can be a toxic mix. With London being the ‘divorce capital’ of the world, because of the huge awards made there by comparison to other countries, funding a divorce settlement could, potentially, wipe out years of hard work and success.

For those entrepreneurs that unfortunately find that their relationship breaks down, the financial tension can increase. The family home, which may be providing financial security for the business, may have to be sold; two homes will be required and family expenditure increases as two households need to be maintained.

The demands on time become even more pressured when trying to fit in children’s schedules. So what can business owners do to limit the potential negative effects of divorce? Here are 10 tips:

1. Don’t get married

Blunt and perhaps brutal but the fact is that there is no such thing as a common-law spouse; cohabitants have no financial claims against each other (although potentially there may be property rights claims or claims for children).

Upon marriage, financial obligations arise and in the event of a divorce the starting point is a 50:50 split of the assets, unless there are good reasons for departure from equality. The Court has a wide discretion to achieve a fair award. In doing so it will take into account all assets held worldwide irrespective of how they are held and when they were acquired.

2. Get a pre-nup

If the desire is for wedding bells, have a pre-nuptial agreement. Although not legally binding, if they are done right – both procedurally and if the provision made within them is fair – they can work. They can avoid the expense of litigation and the intrusion of financial disclosure.

The Law Commission has also recommend that pre-nups become binding if they are a Qualifying Nuptial Agreement (which requires specific safeguards to be met) – so watch this space as there might be a change in the law. Even without a change in the law, the court can hold parties to the terms of a pre-nup.

3. Build your business before getting married

In an ideal world you should set up your business and make it successful before you get married. If only it were that easy! As the Court has discretion, it may treat assets built up or acquired before the marriage differently to those created during the marriage.

It is not cut and dry – each case turns on its own facts – but the existence of the business and development of it into a successful business before the marriage could be highly influential in the division of the assets.

4. Consider a post-nuptial agreement

If you walked down the aisle before you walked into the boardroom, consider having a post-nuptial agreement (although these can be more difficult to do than a pre-nup, as there is very little incentive for the other spouse to have one).

5. Should your spouse be a shareholder?

Think carefully about whether you want your spouse to be a part owner of the business? There may be practical and tax benefits of doing so, but it could be prejudicial in a divorce. The fact that a spouse is not a shareholder will not mean the business will simply be ignored and excluded from the pot to be divided on divorce, but having a spouse as a shareholder may make it more difficult to argue that its not a ‘matrimonial asset’.

Transferring business interests on divorce may also create additional commercial and tax issues to address.

6. What involvement should your spouse have in the business?

Even if a spouse is not to be an owner of the business, think about whether they are to be involved in it in any capacity.

A spouse doesn’t need to be involved in a business to argue they have made a contribution to its success that should be taken into account, but if they have been involved in the business they will be in a much stronger position to argue that their contribution to the fruits of the marriage, including the business, should be reflected in the award.

Spouses working together might also bring more stress to the relationship.

7. Consider how the business could fund a settlement

If there is a divorce, the business may have to be valued, detailed financial information will have to be provided about the historical position and future plans, which can make for an unhappy intrusion for an entrepreneur and fellow business owners.

A challenge for entrepreneurs may be whether or not they can create liquidity from the business to help fund a divorce settlement. If faced with such a situation, it is better to tackle it head on and start thinking commercially and creatively about how to deal with those issues.

Business owners who bury their heads in the sand may lose the opportunity to reach a creative/commercial settlement and may instead face the Court determining the issues and making orders which are less commercially-focused.

8. Practical issues of having your ex-partner as a co-owner

For spouses of entrepreneurs, they may need to consider whether to cut and run – seeking more of the other assets which will be set off for giving up or partially giving up a future interest in the business.

If a former spouse is to retain an interest in the business, whether as a result of liquidity issues, or because the other assets cannot fund a fair settlement, issues about voting rights, pre-emption rights and tax all need to be factored in.

Again, not addressing these issues properly could mean decisions are taken out of the parties’ hands.

9. Business success post-divorce can increase your maintenance costs

Former spouses who have ongoing maintenance claims can come back at a later point and ask for more maintenance or, possibly, for it to be paid for a longer period, or for a capitalised lump sum in lieu of maintenance. For an entrepreneur who has built up a business after a divorce, it can be a shock to find that the post-divorce success can result in an extra payout.

If there are ongoing maintenance obligations, think about whether it is possible to buy them off before the business is started or at an early stage before the business value grows, to minimise the risk that the potential value of the maintenance or lump sum claims also grows.

For entrepreneurs experiencing difficulties, advice should be sought on whether to apply to reduce the level or duration of maintenance.

10. Succession planning to limit exposure

For established businesses, think ahead to succession planning. If interests in businesses are to be passed down the generations, think about whether those next generations are to own the interests outright or whether trust structures are to be put in place.

As successful businesses pass down the generations, and as children and their families become involved in the business, the impact of a divorce may not be contained within the family of the divorcing spouses but may have financial implications and disclosure implications on wider family members. Proper structuring may help to limit the exposure.

I’ve seen entrepreneurs get into difficulties because of decisions taken that could have been avoided with the right help. However, I’ve also seen some amazing achievements come out of a divorce – so it’s not always doom and gloom.

The key is to be informed and to get advisors around you that really understand you and your business, but also your wider needs.

About the author

This article was written for ByteStart by Claire Blakemore, who is a Partner at Withers (+44 207 597 6025). To help guide entrepreneurs through the ever-changing business life cycle, Withers recently launched, Momentum, a new package offering a range of legal and non-legal services including a fixed price legal start-up kit.