What Entrepreneurs Need to Know Before a Divorce

Your business is an asset, and in a divorce that matters.

Many “big money” divorce cases reported in the media can verge on the caricature: a husband who has made his fortune being fleeced by a dependent wife trying to get much bigger settlement than she deserves, accompanied by much headline grabbing acrimony.  In real life, the law is considerably more level-headed — taking as its starting point the principle of equality regardless of who owns what.

Businesses are assets in divorce

There is a common misconception among some business owners and entrepreneurs that a business is ring-fenced and thus excluded from any divorce settlement.  This is not the case: the principle of equality means that all assets must be considered at the outset, including the business, although due consideration is given to matrimonial property (assets built up during the course of a marriage) and non-matrimonial property (which may apply to a proportion of the business if it had been largely built up, or inherited, before the marriage.)

However, each divorce is considered on a case by case basis and judges do have the discretion to depart from this basic principle when it becomes clear that an equal division of assets is not fair, particularly where children are involved and where the assets in question are relatively modest.

If you own the business outright and your spouse is involved then there is more likelihood that the assessment will include some of the value from the business.

It might be some consolation to know that judges are not, on the whole, inclined to instruct the sale or take assets out of a business — not least as businesses provide an income stream on which future maintenance payments may depend. Although judges will take the value of the business into account (depending on the overall shareholdings) when considering the division of assets, they are aware that businesses, compared to property and cash, are generally illiquid in nature, and tend to factor this into their decisions.

Get legal advice early

This gives both parties an opportunity to negotiate a fair, sensible split of assets which may include some of the collateral in the business. To an extent, the outcome of mediation will depend on the type, structure and value of the business as well as the level of income it provides. If you own the business outright and your spouse is involved then there is more likelihood that the assessment will include some of the value from the business. If you cannot agree, then it is likely that court proceedings will follow.

Take note that if your spouse is employed, or otherwise involved, in the business, do not assume that you can sack them or make them redundant – that way lies a potential claim for wrongful or constructive dismissal. Their future involvement in the business will require negotiation.

Don’t try and hide any assets

There is some, limited action you can take to protect your current financial position, such as lowering your credit card limit (particularly important if your business’s financial position is closely combined with your personal finances) but you should only take this sort of action with legal advice. It will count against you if the court believes you are unfairly restricting your spouse’s access to money.

Whichever agreement you finally arrive at, it is important that the financial settlement is agreed via a court order, making it legally binding and enforceable.

Do not be tempted to try and hide any assets. Judges take a very dim view of spouses who deliberately hide money and other assets. The only result of such action is that your divorce will take considerably longer and will be considerably more expensive. The recent decision made in the UK by the Supreme Court to allow two wives (Mrs Sharland and Mrs Gohil) whose husbands were found to have deliberately hidden their real worth, to have their original divorce claims reheard, underlines the seriousness with which the courts view attempts to hide assets.

Neither should you seek to hide personal assets within your business. In certain limited circumstances judges can “pierce the corporate veil” and gain access to those assets if they are required to meet the needs of your spouse, or to enforce a decision already made.

Future protection

Whichever agreement you finally arrive at, it is important that the financial settlement is agreed via a court order, making it legally binding and enforceable. This will prevent your spouse from making a claim against you in future which could be very significant if your business continues to thrive.

For future reference, if you remarry, you might consider a pre-nuptial agreement. Although they are still not binding per se, most judges will now view them sympathetically provided they have been properly drawn up in the first instance (i.e. with lawyers advising both parties independently). We are seeing more and more business owners consulting us on such agreements because they can be a useful wealth protection tool, giving much greater certainty over of the future of the business and any final financial settlement. This is not only helpful if you own the business outright but also for any shareholders who will be keen to protect their investment.
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Photo: Getty Images

About Justin Creed

Justin Creed is a trained collaborative family lawyer with Wright Hassall he typically advises highnet worth clients from the business and entrepreneur community.

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