How does divorce affect your business?
Aside from the personal trauma, what does separation mean for the future of your venture?
Entrepreneurs sacrifice huge amounts of their time and money building up successful businesses. They are passionate, ambitious and they accept that there is risk – whether from bad luck, a bad idea or stiff competition – that may cost them their business.
However, the divorce of a business's founder can also have a dramatic and dreadful effect – not just through the distress and distraction for those involved, but particularly through the cost of the final settlement – possibly necessitating the sale of some or all of the business to finance it.
Following the landmark divorce case of White v White in 2001, the overarching principle in divorce cases is that the family's assets should be shared on a basis which reflects the respective contributions of the parties.
However, vitally, in assessing contributions the role of the ‘homemaker' (typically the wife) will be seen by the Court as no less valuable than that of the ‘breadwinner' (often, but not always, the husband).
To decide on an appropriate percentage for each party, the Court is required to test its proposed decision ‘against the yardstick of equity'. For most cases this will be a 50-50 split.
Recently Sir Martin Sorrell successfully argued that he had made a “stellar” contribution to the family's wealth, and was awarded 60% of the family's fortune of about £75million…. So if someone that successful gets 60%, most business owners will get a lot less, and certainly won't get much more than half.
In Britain, statistically, you are more likely to divorce than to stay married for life. So the bad news for entrepreneurs is that, if they divorce, their spouse will be entitled to half of the value of the business. Some may think this is fair – after all the entrepreneur may well have risked the family home and livelihood when starting up, so at the very least the spouse in a long marriage may well have incurred financial risk and provided invaluable support, whether they wanted to or not!
Advice for the single A cynic might say “stay single”. However, only a real miser would prefer such a cold and unromantic view. If you are not married but have built up a valuable business, you could consider a Pre-Nuptial Agreement to protect your wealth should the marriage not last.
Whilst not enshrined as binding in law, courts are certainly highly likely to take them into account in distributing assets in a divorce providing each party was properly advised, gave full disclosure, did not apply pressure and understood the nature of the agreement.
Whether your fiancée will appreciate a pre-nuptial agreement will have to be left to your judgment. Although given the cost and heartache that hostile divorces involve, a well thought out agreement that both people see as fair should avoid subsequent heartache should your marriage end.
Advice for the married The truth is that if you are married, it's a bit late for a pre-nuptial agreement. You could innovate and ask your spouse to sign a “post nuptial agreement” but I can't help thinking this may hasten a costly divorce! After all, at the ceremony you almost certainly promised to endow your spouse “with all your worldly goods” – so your spouse has a matrimonial entitlement to a share of your assets and that can't be undone by anyone but them.
Minimising the impact of divorce on a business When I advise business owners involved in divorces, I have two main principles: 1. If a business is the source of your family's current prosperity then everything must be done to keep it going successfully (or else the family's prosperity will suffer) 2. A sensible and commercial view must be taken when valuing the business (with everything possible being done early on to get consensus between the two parties so costs don't escalate needlessly).
These principles are important since the courts are increasingly looking to achieve a ‘clean break' settlement between the husband and wife, with additional payments for their children being provided for via periodical payments. In most cases, the parties will want to have the business valued so that the “clean break” can be achieved by one party buying out the other. However, be careful as this is not necessarily the best approach for you and your business:
Firstly, a business may be profitable and successful but, at the same time, not be worth the sort of sum, post costs and Capital Gains Tax (even at only 10 per cent) to enable the family's lifestyle to continue at the pre-divorce level.
Secondly, even if a value can be agreed it may be impossible for the party purchasing to fund the acquisition – especially if the former matrimonial home is passing to the other party and there are no other significant non-business assets.
Thirdly, and perhaps practically most importantly, where both husband and wife are instrumental in the business, the continued involvement of both parties in their respective roles may be fundamental to its future success.
For these reasons there is a strong argument for an income stream arising from the business to continue to be used for the family's benefit via periodical payments until, if in the fullness of time, the business is sold to a third party. Then the interests of both parties can be capitalised.
To consider checklist:
- Can the business be operated without the involvement of both parties?
- If only one party is involved, can the other be confident that the business will be run in an open and honest manner?
- Can a “clean break” be funded either immediately or on a safe and secure deferred basis?
- How will the staff react to the divorce?
- Has an independent and commercially realistic view of how to resolve the business issues been obtained?
Jeffrey Nedas heads the Family Law team at BDO Stoy Hayward LLP and has acted as an Expert Witness in over 50 divorces involving the valuation of businesses and business interests.
Jeffrey can be contacted by telephone on 020 7893 2497, or by email, Jeffrey.firstname.lastname@example.org. www.bdo.co.uk