Why divorce could cost you your business
Could your business suffer from the personal trauma of divorce?
It doesn't only cast a shadow over your personal life, it can also throw dark financial clouds over your business.
You may have kept your working life separate from your home, but when love breaks down the two come into costly and unstoppable collision. Your spouse may have never even set foot on your business premises, but if you split they could still claim up to half its assets.
And the bad news for the entrepreneur is that recent legal cases, notably Lambert v Lambert, have seen the pendulum swing in favour of the spouse. Entrepreneur Harry Lambert built up family wealth worth £20.2m from his free sheet newspaper business, Adscene. When he split from his wife Shan Elizabeth after 23 years of marriage she claimed half of those assets, even though Harry was the driving force behind the business.
In October 2001 a judge ruled that she should receive 37%, totalling a cool £7.5m. But a year later the Court of Appeal overturned this and ordered a straight split down the middle declaring it was intrinsically wrong to view the breadwinner as making a greater contribution than the homemaker, because she may have sacrificed her own career.
“This and other high-profile cases have thrown a big question mark over young entrepreneurs,” says Peter Watson- Lee, chairman of the family law committee of the Law Society. “Unless you can prove you have made a ‘stellar' contribution to the success of your business – and this is mighty difficult to do now – it may be hard to argue against splitting business assets in half.”
The divorce courts are a lottery, and when your business is involved the stakes are higher and the odds even harder to call. The final settlement depends on a series of factors, including the length of your marriage, your contribution to the business, the presence of children, future case law and the whim of a judge. Marriage shaky? Feeling nervous? You should be.
It could be you
Last year 160,000 married couples split, the highest annual divorce total since 1996, according to the Office of National Statistics. There are now 4.9m divorced people in the UK, the highest number in Europe. Four out of 10 married couples will eventually part.
As people marry later, the average age for divorce has crept up to 42 years for men and 39 years for women – with their marriages lasting an average 11 years. Advisory service, Relate, says long working hours are a growing source of marital discord, which is bad news for hard-working entrepreneurs.
Around seven out of 10 divorces are among firsttime couples, but this percentage is falling as the number of second and third marriages grow. If you have been previously divorced, it is more likely any future marriage will fail. Marrying young also makes divorce more likely.
These are dismal figures but they don't deter the 250,000 couples who put their trust in this beleagured institution every year. One in six people now move in with their partner rather than marrying. The average couple cohabits for just over three years, with six out of 10 then getting married. But people who live together are nine times more likely to break up than married couples.
Breaking up is hard to do, and it is also expensive. The average divorcing couple faces a £13,000 bill in the first year alone, or £6,525 each, according to new research from Norwich Union. More than one in three are forced to sell their own home to cover the cost of splitting up, and maintenance payments, legal fees and childcare costs are all added to the bill. This figure could be much, much higher for entrepreneurs.
A messy business
The phrase “and with all my worldly goods I thee endow…” sharpens into focus when you hit the divorce courts. It is doubtful that you were thinking about your business assets when you recited your wedding vows, but your spouse will be thinking about them now.
The law is currently moving in favour of the spouse. In 1997, Lady Caroline Conran, wife of restauranteur and retailer Sir Terence Conran, was awarded £10.5m after their 30-year marriage (with three children) broke up, in recognition of her “outstanding contribution” to his career. That equated to around 10% of the design guru's £80m fortune at the time, and he was bleating about that. “Now he would get short shrift and Lady Conran could look forward to £40m. This really is a major change yet there has been no Act of Parliament, merely a development in case law,” says Peter Watson-Lee.
Don't kid yourself, when you divorce, your business assets are up for grabs as much as your home, car and holiday cottage. You might expect this, if you have both played an equal part in the business, but the principle is the same if your spouse stayed at home. There is now hardly any distinction between the breadwinner and homemaker, both are considered to have made an equal contribution to family wealth. You built a thriving multi-million pound business, your spouse raised three ‘orrible delinquents, result: a 50:50 split.
“The length of marriage will determine the scale of the settlement. The longer the marriage, the more equal the split, particularly if there are children. In shorter, childless marriages where the spouse has played little part in the business, means you may hang on to much more,” Watson-Lee says. You also have a better chance of hanging on to assets accumulated before wedlock.
Entrepreneurs used to defend themselves by saying if they took the assets out of their business, it could go bust. “Now courts say that's a matter for you – your spouse should get half even if you have to sell the business. The fact that you might be killing the goose that lays the golden egg is no argument anymore,” he says.
In most cases, entrepreneurs should be able to refinance and keep their business afloat, although in difficult economic conditions it could prove tougher to get that bank loan.
Spouse rights vanish if bankruptcy is declared – the ultimate deterrent. “All assets would go to the trustee in bankruptcy, who would then sell them to pay your debts. Your spouse won't get anything, but neither will you,” Watson-Lee says.
The time to plan for a fair division of marital spoils is when everybody is still talking to each other.
Where both partners are shareholders working in the business, consider drawing up a shareholder agreement, says Toni Pincott, forensic and investigations services partner with accountants Grant Thornton. “This can take the heat out of a later divorce. Would you both stay within the business and in what capacity? Or would one of you sell your shares, and if so, how would you value their shares?”
The shareholder agreement doesn't give absolute protection – divorce courts have sweeping powers. If the judge felt the agreement was unfair, he might redress any inequalities when divvying up other marital assets.
Matters are complicated if your non-working spouse – or any family member – holds shares in the business. “Entrepreneurs often grant their partner, say, 10% of the shares, but this gives them a certain nuisance value. It might be hard to get a clean break if your former spouse has a stake in the business but refuses to sell,” Pincott says.
Another problem is actually getting money out of the business to pay off your spouse. “You could take the money as income or dividends, but could face a hefty income tax bill. Loans are generally prohibited under the Companies Act. The sensible option is to build wealth outside the business, giving you spare cash to fund a matrimonial settlement,” she says.
You should also be honest with your partner about the state of the business. “Many entrepreneurs give the impression that their business is much more successful than it really is, or has much lower borrowings. Spouses are rightly sceptical when they are suddenly told it is struggling, and this can lead to nasty disputes,” Pincott says.
One common sticking point is how to value the business – two valuers can give wildly different figures (and you pay two sets of fees). Agree which valuer to use in advance.
If you do finally split from your partner, always fully disclose your finances, the courts don't like being lied to.
Businessman Graham Shipley, 57, cheated his two exwives out of their share of his fortune after lying in documents submitted to York Crown Court during divorce proceedings. He pleaded poverty during his first divorce in 1985, failing to mention a £150,000 golden handshake from his former employers.
After his second marriage collapsed in 1999, Shipley claimed this was a long-term loan rather than a gift, to prevent his wife from getting a share of the family home. He was jailed for 18 months in March.
There is another alternative, simply avoid getting married at all. Be cynical: continue to live the single life or stay with your partner without plighting your troth.
Unmarried couples are not covered by family law and have little legal protection, says Louise Coubrough, solicitor at Bindman & Partners, London. Contrary to popular belief, there is no such thing as a common law spouse.
“Your partner could claim a share of your wealth on behalf of any children, but not for themselves. They can also claim an equal share of any assets that are held in joint names – such as a home you bought together – even if their contribution was much smaller. But cohabitation in itself confers no rights.”