For some married couples, the prospect of owning and running a business together is a dream come true. Unfortunately, not every marriage is built to last, and all of a sudden this dream can come crumbling down, leaving a tangle of legalities surrounding the business rights.
Rarely do these couples consult a family lawyer at the start of their venture, but doing so is advised. It may seem unnecessary to discuss the possibility of divorce whilst you are still happily married, but being prepared for certain situations is vital in a business setting.
Consider this idea from a similar standpoint to an insurance policy: you take out contents insurance to protect your belongings from various incidents such as fire or theft. You hope to never be the victim of fire or theft, but having an insurance policy in place provides reassurance that the support is there if the situation does arise. Discussing a plan for the business in the event of a divorce is exactly the same.
What’s to happen to a joint business in the case of divorce can be set out within a pre-nuptial agreement (pre-nup). A pre-nup can be made and signed prior to marriage, or at any point throughout the marriage. Without a pre-nup or any form of settled agreement, the courts must decide a reasonable way to split the business between both parties.
Splitting matrimonial property
Under the Family Law (Scotland) Act 1985, the ‘net value of matrimonial property’ should be shared fairly between both parties. Common assets that may require mediation in order to reasonably split are a co-owned car, or the marital home, and if the couple owns a business together, then the business is also a marital asset that needs to be fairly split.
The business classes as a marital asset if it was founded as a joint venture after marriage, or if the business was owned by one party and then restructured after marriage to involve the partner, either by allotting shares to them or appointing them as a director of the business. The divorce lawyers involved must learn the facts, including the makeup of the business and what both parties’ intentions are in order to reach a reasonable agreement.
Can the business continue as usual?
People often associate divorce with betrayal, distrust and strong negative emotions between both parties, but this isn’t the case for every divorce. In some instances, both parties have simply realised that they were not meant to be together romantically, but can remain civil with each other. This can make it much easier if the parties co-own a business, as they may believe that they can continue business as usual post-divorce without any major implications for the business or their separate lives. Of course, this is not a viable solution for all, so other options must be explored.
Can the business be split into two?
In order for both parties to maintain their business, whilst cutting all ties with each other, a business can technically be split into two independent ventures, depending on the business type and structure. If there are already two existing commercial areas or trading divisions, it may appear a simple fix to allocate one to each party, but there will be certain resources shared across the business that make this change harder. For example, the whole business, although perhaps at separate sites, are likely to utilise the same accounting or marketing departments. To successfully split into two viable businesses, these shared resources would also need a reasonable way to be split as well.
Can the business be sold?
One of the simplest solutions is to sell the business, materialising the asset in order to allocate equal shares of the profit to each party. In some instances, where both parties wish to completely detach themselves from the business, this is likely to be the best option.
If one party wishes to solely own the business whilst the other is happy to leave, then the retaining party much pay off the other owner. To do so, the business must be formerly valued by an independent third party to determine what amount is owed. It’s worth noting that valuing a business is not an exact science, so it is often worth having the business valued by multiple accountants, before deciding upon a fair price with the assistance of a solicitor.
If the party retaining the business cannot afford to pay the agreed amount, other assets may be used for negotiation. For example, one party may keep the business, whilst the other retains the marital home. Negotiations such as this would need to be agreed by both parties, with the assistance of solicitors or the court to ensure that neither party will be at a loss from this deal.
Can you close the business?
If none of the above mentioned routes are viable options, the solution may be to simply close the business. The court will often be reluctant to do so if the business has employees, other than the divorcing parties, who would lose their job as a result. However, if no reasonable arrangement can be agreed upon, few other options remain.
Prevention is better than cure
Given the complexities presented when divorcing with a business, it is highly beneficial to have a plan in place ahead of time. By meeting with a family lawyer to discuss the plans for the business in the event of divorce, you can agree a reasonable arrangement whilst maintaining a clear head, since it’s much easier to decide what is best for both parties before a potential breakdown of the relationship.
If you’re looking to start a business with your partner, or perhaps join your partner in an existing business venture, get in touch with a family lawyer today.
John Roberts is a Partner and Director of Austin Lafferty. John has been with the firm for almost 20 years, with experience in all areas of family law, including divorce and separation, adoption and contact.
