When you divorce your business assets are usually considered to be matrimonial assets which will form part of the pot to be distributed between you and your ex.
This means your business is likely to come under intense scrutiny regarding its value, how much income it produces and its assets.
To protect your business from divorce, the best tactic is prevention rather than cure. There are a number of steps that you can take:
- Pre-nuptial or post-nuptial agreements can be helpful in limiting future claims against your business. Ensure the day-to-day arrangements reflect the terms of the agreement.
- Try to avoid mixing your business assets and your private assets unless absolutely necessary. For example, avoid borrowing against the matrimonial home to secure borrowing to assist the business.
- It can be tempting to involve your spouse in the business, not least for tax planning purposes, however involving your spouse may enable them to argue that they have contributed to the success of the business.
- Sharing ownership with third parties often helps. If the business is jointly owned with other shareholders or partners, the court will take a different approach to liquidity if taking money out of the business would damage their livelihoods also.
- Succession planning is useful particularly if you wish for your children to inherit your business interests.
If you haven’t made prior arrangements and divorce proceedings are underway, there are several questions to consider:
- Who set up the business and when? If the business was set up before the marriage or after your separation, it could be argued that it is a non-matrimonial asset. However, if your spouse has contributed to developing the business, they will be entitled to a share in it or equivalent from other marital assets. Wherever possible the court will avoid the sale of the business by compensating the other party with a larger share of the assets or through maintenance payments.
- What is the value of the business and what assets are held by it? It is often necessary to obtain an expert valuation of the business which the court will look at alongside the asset base as a whole.
- What is the position regarding the sale of shares? Are there any restrictions in the memorandum and articles of association or any shareholder agreements in force placing limitations upon the selling of shares to third parties?
- What is the financial structure of the business? Is it asset heavy but income light? Company assets such as commercial property or stock can be deemed to be matrimonial assets and sold if doing so will not damage the business. If the business is income heavy then the court may approach matters by way of a maintenance order.
- What are the plans for the business? The court will not wish to disrupt the long-term plans of the business unless absolutely necessary.
Ultimately the needs of the parties will be the court’s paramount concern.