The Effects of Divorce On Business: How To Avoid Problems

Solicitor Karen Holden blogs on how couples who own a business should prepare for a divorce - no matter how unlikely it might seem

The Effects of Divorce On Business: How To Avoid Problems

In my 15 years as a solicitor, I have dealt with every kind of case imaginable from intellectual property disputes to unfair dismissal claims, surrogacy, commercial litigation and insolvencies.

Despite the varied nature of my work, there is one area of law that has kept me rather busy in recent years and continues to dominate my team’s work load.

Since launching A City Law Firm in 2009, I have noticed an increasing trend of couples going into business together and then sadly divorcing, which can lead to mass ruptures across the business.

Going into business with your partner can be hugely positive but there needs to be an abundance of trust, like-minded thinking, honesty and some suitable paperwork.

Over the years, I have dealt with numerous couples who have gone into business together without suitable legal protection because they didn’t feel it was necessary. Having THAT conversation is not easy or romantic, but it’s certainly very necessary. A written agreement cannot only save the business, but stop any misunderstandings, from the onset, so actually avoiding any conflict to start with.

If your relationship fails, it can have a serious impact on your business so how can you protect yourself and the business from the effects of divorce?

Founder’s agreement

Every business with more than one owner should have a founder’s agreement in place. For married couples this is crucial and I cannot stress this enough, especially as often you hold equal shares.

When you’re happy in your relationship and everything is running smoothly, the idea of what is a ‘business pre-nup’ seems unnecessary and probably quite awkward to discuss but please consider this; without legal documentation, if it goes terribly wrong you could be leaving it to a court to decide on the ‘fair’ division of your assets. If the court cannot resolve it, then it could be wound up!

When it comes to divorce, many entrepreneurs (men and women) often don’t realise that their partner may be entitled to a 50:50 split of their company – even if through all your sweat and tears they haven’t been really involved at all.  The longer you are in your marriage; children or the financial resource disparity, the more likely this becomes.

The equal division is frequently the starting point for family proceedings and unless you can prove why it is unfair, you may be forced into a situation where you have to buy out your business partner.  Many businesses don’t have the free capital for this and it could be the beginning of the end.

Several months ago, I dealt with a client who had no legal documentation and the business could not afford to buy the partner out. The couple were forced to work alongside each other for 18 months before they could afford a clean break which caused enormous friction, staffing issues and terrible disruption to the business.

If it’s not too late, get a founder’s agreement (Shareholder’s agreement for companies) drawn up and often suggested incorporate a company also – to cover the following points:

  • Transfer of all IP to the holding 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
  • Clarify how the business will be valued, shares sold/bought if one of you leaves and define each of your rights and roles

This agreement offers you a transparent and sound platform on which to build your business.

Pre-and post nups

In addition to the founder’s agreement, I would suggest getting a pre or post-nuptial agreement in place as it can be very persuasive during divorce proceedings. Also ensure your will mirrors these documents too because in the event of your death, it governs where your shares or their cash value go and how this will be distributed.  This is really important, especially if you have children together.

Dirty tactics

When your relationship has broken down and emotions are involved, it is hard to make logical and rational business decisions.

Over the years’ I have witnessed some questionable tactics from owners trying to protect their businesses – hiding assets, selling them at an undervalue and even delaying account preparation.  Sometimes partners will even gift assets away ahead of anticipated divorce proceedings to spite the other party and reduce the overall value and share of the company.

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.

Summary

If you’re a couple in love on the verge of going into business together or you’re an established partnership without any documentation in place, make it your priority to address this.

A simple founder’s agreement could save a lot of heartache down the line so get savvy and ensure your business is protected. Besides investors look for this clever forward thinking and eventually as you grow its an essential part of your business so why risk waiting.


Karen Holden is the founder of A City Law Firm.

1 Comment

  1. I have never really thought of my business being connected to my marriage . My husband is a shareholder as he gave me some money to set up but isn’t really part of the business. This has actually really made me think as I employ staff etc
    Very useful but scary

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