Divorce & The Family Business

Divorce can be tricky enough to navigate without the added complication of a business that the couple run between them, but of course this is the reality for many divorcing couples.

When the couple first got married, it may have been that the business was only very small – perhaps it didn’t even exist, and was created after the wedding. The point is, for many the family business wasn’t worth that much at the beginning. However, as the years go by, hopefully the business will be making more money. That’s great for you as a couple, and as a family, but not so great if the relationship breaks down as it does make things potentially much more difficult.

On top of this, it’s quite usual for a couple to have a lot of their net worth tied up in a business, and this can mean that there isn’t enough money for them to buy one another out if they truly can no longer manage to work together. And, if the divorce is a messy one and the couple dislike one another, the idea of working together simply won’t appeal.

So what happens?

It can mean that, in some cases, the business has to be sold in order to free up the cash to let one of the partners out. Alternatively it may have to take on a lot of debt. Therefore, it can be very important to protect that business, just in case you divorce later down the line.

How can this be done?

The first way to protect the family business is to sign a prenuptial agreement. This can be done if one of the partners started the business before the marriage took place. The prenup will specify what will happen to the company if a divorce were to ever happen. If a prenup is not something you feel comfortable doing, then why not consider a buy-sell agreement? This is also known as a buy out agreement, and is a contract between all the owners of a business. This can be useful for reasons other than divorce (it will also come into effect if one of the partners dies, for example). It requires one partner to sell their part of the business back at a price that has already been set.

A trust may also be a useful way to save a business from falling apart financially because of a divorce. This trust can keep assets or finances to one side, kept back for children, for example. That way it cannot be touched if the business has to pay for a divorce between partners.

The best way to protect a business is to stay together. Not necessarily in marriage, but in work. This isn’t an option open to all divorcing couples, but if you are able to structure a business in such a way that, even if you divorce as a couple the business can still run, and won’t be affected in any way, including financially, then it will make things a lot easier. A shareholder agreement may have to be drawn up to ensure that this can happen, or allows one of the spouses to buy the other out at a later date.

If you need further advice regarding divorce and finances, please get in touch.

Simon Walland