Amy Wilson Weymouth, Associate in the family team at Gardner Leader, explains everything you need to know about divorcing your business partner.
Setting up a business with your spouse can be an exciting and thrilling time. The possibilities are endless as you look to the future and work together to achieve your business dream. Often the last thing you consider is what will happen to the business in the event of a divorce. To discuss this seems uncomfortable and instructing a solicitor to draw up commercial agreements to cover such an eventuality may seem needless. But with no plan and formal legal agreement in place, the ending of a relationship can have disastrous consequences for a business. Here are three questions to ask to help protect your business against the possible impact of a divorce:
Will I lose the business?
One of the top concerns for divorcing business partners is “will I lose the business?”. While the court does have the authority to order the sale of a business, it is very careful in using this power. After all, a successful business is likely to provide for you and your family for years to come, so it would not necessarily be in everyone’s interests for it to simply be sold.
Spouses can reach an agreement on the business’s future without necessarily having to go through the courts. This is the most straightforward way to resolve the matter. You may consider simply ceasing all business operations to enable both of you to move on from the business. Alternatively, if one partner is far more involved in the business than the other, then they may stay in the business and buy the other partner out. In some cases, separated couples can manage their business together and maintain a positive professional relationship but this may not always be possible.
Using a skilled mediator to work through the best solution for both partners and the business can be a lifeline to resolving the issue and avoiding court. The mediator will encourage open conversations between the parties in order to help reach a settlement.
Can I buy out my former spouse?
If you have the funds then it is often possible to buy the other partner out of the business. This means buying the other’s interest/share in the business.
There are several ways to do this, for example, one of you may retain ownership of the business and pay your partner maintenance/an income, or a lump sum payment equal to their share/interest could be made in exchange for them leaving the business. If maintenance were to be paid, this would be from you as an individual as opposed to from the business itself. Whatever the decision, it’s advised to instruct a financial expert to value the business before evaluating possibilities for buying out your spouse.
How do we split the business assets?
In family proceedings, joint assets accumulated during the marriage typically form part of the "matrimonial pot” and are often merged and distributed between the parties following a divorce if there is no legal document specifying otherwise.
Dividing up the business assets can be a complicated process depending on the nature of the business and it is important to remember that a business is its own legal entity, distinct from its owners or shareholders in the case of a limited company. Firstly, if one party wants to buy the other out or if the two parties cannot come to an agreement the assets must be valued. The division of assets begins with the assumption that these will be divided equally, and any move away from this must be justified.
Depending on a variety of factors, the division of business assets will differ. In many cases, the division won’t simply be 50/50. This could be due to a variety of reasons including, whether a commercial agreement was drafted at the time of the business's inception or if one partner spent more time establishing the business than the other.
Taking specialist legal advice and entering into a formal written agreement when starting a business or prior to marrying your business partner, is the best way to try to limit the potential impact of future divorce proceedings on the division of the business. Such an agreement could set out what you would like to happen in the event of a breakdown of your marriage in accordance with each partners’ contributions and potentially prevent the business from simply being divided equally between you.
There are many things to consider when a marriage breaks down and especially when the partnership involves a jointly owned business. Having commercial agreements in place from the start of the business relationship can help to alleviate any complexities that might arise later, including in the event of a partnership split and minimise any impact on the future of the business.
