From 1970 until 2008, the divorce rate across the world has doubled . It’s therefore no wonder many business owners become concerned about the impact a divorce could have on their company. We have a look at the possible impacts, such as what happens when divorcing parties both own shares in a business and what are the implications when your spouse is involved in the business.
The financial impact of divorce on a business
All finances come into play during a divorce settlement and businesses are no exception, whether you are a sole trader, partnership or operate as a limited company. Matrimonial assets include the family home, pensions, and investments acquired during and before you got married. Dividing these assets is usually more straightforward than splitting business assets, particularly if there are other business partners involved.
Potential key impacts on your business
- If your spouse is or was involved in the company in some capacity or had a senior role, then things can get complex as they will still have a legitimate voice in how the business or aspects of it are run.
- The everyday running of a business can also be affected if you are distracted by matters related to your divorce. You may have to attend court, communicate regularly with your solicitors and find an independent valuer to assess your business. As full financial disclosure is necessary in settlements, you will also need to spend time gathering necessary documentation. These can all take you away from your usual day to day activities.
- If your ex-spouse can show that they experienced economic hardship as a result of you setting up or running the business, e.g., they looked after the children and the family home while you were working on the company, they may have a stronger claim for a share in it in a divorce case.
- Usually, the courts will aim to keep a business with its owner, and your former spouse may receive a larger portion of other matrimonial assets as compensation. In rare cases, for example, if you are equal business partners with your spouse, or if your partner owns a large share of the company and there is no available cash within the business to pay them off, there may be no other option but to sell it.
- If you both own shares in the business, the courts will view these as dividable financial assets. They will take all other financial matters into consideration when determining how these will be split.
How to limit the impact of divorce on your business
- Drawing up a post or pre-nuptial agreement is always wise when there is a business involved in a divorce. In the agreement, clearly state what would happen to the business in the event of a divorce and whether it should be considered a separate entity to your matrimonial finances. You can also state what the agreed value of the business will be and details on the increase in value of any assets.
- Getting your business accurately valued will go some way in protecting it. You can appoint an agreed and reputable valuer or business transfer agent or the court may appoint someone. Their aim is to provide a valuation of the business to help determine a final settlement. They will look at the sales of other similar businesses, what assets the business has, and what its cash flow is.
- Finally, don’t conflate your business finances with that of your personal finances. If you are trying to demonstrate the separateness of your business in a financial settlement further down the line, this will dilute your case. For example, steer clear of using any equity in the family home to invest in the business.
If you have a business and are going through or considering a divorce it is always advisable to speak to a family lawyer well-versed in cases with businesses involved.