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How Will Divorce Affect Your Business?
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Rupali Wagh
Article Written by Rupali. 
By Rupali Wagh
Published on 06/13/2008
 
Starting a business and successfully managing it requires a great deal of time, effort, financial risk and perseverance. Many married couples decide to run a business together, each performing those tasks that are most closely aligned with his or her individual skill set.

How Will Divorce Affect Your Business?

Starting a business and successfully managing it requires a great deal of time, effort, financial risk and perseverance. Many married couples decide to run a business together, each performing those tasks that are most closely aligned with his or her individual skill set. In other marriages, only one partner runs a company while the other continues to work for an outside employer or stays home to care for the house and children. Whatever division of labor you use, the odds are good that the business has an overarching impact on family life and finances. This is normal and expected. However, problems can arise in the event of divorce.

 

Prevailing British law dictates that family assets be divided according to the respective contributions of each person. However, the courts value the contributions of a homemaker equally to those of a breadwinner. In practice, this means that assets are almost always split 50-50, regardless of the exact division of labor that a family utilizes. Occasional exceptions are made when one spouse can prove that he or she was far more responsible for a family's accumulation of assets than was the other partner. Even in these rare cases, however, it is extremely unlikely that you will receive even two thirds of the assets. The business is considered an asset, as are any funds that it generates. Therefore, the financial ramifications of the divorce must be carefully considered.

 

Keep in mind that your priority should be to keep the business running and financially solvent while you are negotiating an agreement, particularly if the business is a primary source of the family's income. During a divorce situation, emotions run high and the divorcing partners may be angry or bitter. It is important to keep your emotions in check and avoid making decisions that are not backed up by logical facts. Even if it is difficult for you, both partners should continue to make their usual contributions to the business during the process of settlement.

 

The simplest solution to the problem of handling a business during a divorce is for one partner to buy out the other's interest. This can be negotiated between the husband and wife and their respective solicitors. In order to achieve a fair buyout, it is necessary to achieve a fair valuation of the company. Beginning this process early and settling as soon as possible is in the best interest of both parties if this solution is chosen. Dragging out the process will only lead to escalating tensions and rising costs, as well as potentially affecting the business operations.

 

A financial buyout is not always feasible, however. It may be impossible for you and your spouse to agree on a price. The party that wishes to continue operating the company may not have the available funding to complete the buyout. Or each party may play a unique role in the company's management that the other cannot easily fill. If it is not feasible for an immediate buyout to occur, then you must reach an alternative agreement.

If one party is capable of managing the business alone and the two of you decide not to perform a buyout, it is possible to reach an agreement in which both partners will receive an equitable portion of the income stream generated by the business. This agreement must be carefully negotiated to account for fluctuations in the business income as well as the honesty or dishonesty of the managing partner. Transparency and access to business records are crucial in order for this solution to work. It may be best to agree on a payment of a percentage of profits rather than a set sum each month. However, you should specify in writing exactly what constitutes "profits," as an embittered spouse may choose to invest in costly and unnecessary upgrades to the business in order to minimize the amount that must be paid to the ex-spouse.

 

If both partners are essential to the running of the company, or if neither of you is willing to forgo your claim, it may be possible for you to continue the business relationship despite the breakdown of the personal relationship. This can work in the case of an amicable divorce in which the spouses remain friends, but should be approached with caution. The business could suffer irreparable damage if either of you use it as a battleground. If you decide to try this solution, spell out in writing each partner's individual job description, including those areas for which each partner has final decision making authority. Separate your jobs as much as possible.

 

If you decide to try either of the above solutions, it is important to take your staff into account. They will be impacted by your divorce on both a business and personal level. Be sure that your staff is kept informed of any changes in business structure. If the two of you will continue to work together on the business, it may be necessary to reshuffle staff as part of the new division of labor. It is not necessary to tell your employees the details, but it is important to let them know what is happening and why. Also remember that it is both unethical and counterproductive to the success of the business to try to force employees to take sides. Leave your personal relationship at home and focus on the business while at work.

 

Another option is to sell the business to a third party and divide the proceeds. This may be heartbreaking if your identity is heavily invested in the company, but may be the only logical way to proceed if you and your partner reach an impasse. This will ensure a clean break and avoid many of the pitfalls associated with continuing a family business after the breakup of the family. Proceed with caution, ensuring that emotions do not prevent you from receiving a fair price. It is best if you work together to sell the business, to ensure that both spouses are comfortable with the transaction. If this is not practical, then it is wise for the selling partner to receive written agreement to the terms of the contract from his or her spouse prior to finalizing a sale.

 

If you are not yet married, you might want to take steps to protect your current business interests prior to marrying. Prenuptial agreements are hardly romantic, but provide the best available protection of the personal assets that you bring into a marriage. Negotiating a fair and reasonable prenuptial agreement can give both partners peace of mind in the event that the marriage should fail. A prenuptial agreement is not protected by law, but courts are generally willing to honor it provided that it was fairly negotiated with full disclosure. Have your agreement drawn up by a solicitor to ensure that it is legal and proper.

 

A divorce is generally complicated and marked by financial battles. When a family business is involved, it is common for the company to become the focus of both spouses' anger and resentment. However, if you can both keep your emotions in check, it is possible to negotiate an agreement that is fair and equitable for both parties. Keep your goal in mind and work to achieve it. Of course, legal representation should be a part of your negotiations as well.

 

Be Business Smart has been created to assist anyone who is setting up a new company and to offer valuable support and advice to individuals who wish to expand their current business.

 

Did you realise that approximately 80% of new businesses fail each year? You certainly don't want to become one of those statistics. Fortunately, Be Business Smart can provide you with the help and support you need to ensure your business becomes a success!

 

Be Business Smart offers two levels of membership to suit your business budget. Here at Be Business Smart, we have a lot to offer any new business, but please don't take our word for it. We encourage you to browse our website and see for yourself. http://www.bebusinesssmart.com