by John Roberts (Austin Lafferty)
Divorce and business: divorcing your business partner
Working in family law, you see a variety of different circumstances and situations when it comes to divorce. Everybody is aware of common difficulties in divorce cases, like agreeing on child custody or agreeing on which party can keep the marital home, but a lesser-considered bump in the road is when the divorcing couple own a business together.
Perhaps one party owned a business prior to the marriage, that was then restructured to bring their partner in at a directorial level, or instead, the couple may have built the business together throughout their relationship. Whatever the circumstances, it’s unlikely that the couple consulted a family lawyer in the early stages. It may seem like a bad omen to consult a lawyer when there are no concerns about the marriage, but even the strongest relationships can break down, and with a business involved it is always better to be safe than sorry.
The legality of divorce and business
A business is an asset, and irrelevant of who owns the larger portion on paper, it is classed as a shared marital asset. Under the Family Law (Scotland) Act 1985, the ‘net value of the matrimonial property’ should be shared fairly. Since the business falls under the umbrella of ‘matrimonial property’, a fair way to share the business between parties must be mediated.
If a pre-nuptial agreement (pre-nup) is in place stating what actions are to take place concerning the business in the event of divorce, this process is pretty much cut and dry. However, if there is no pre-nup in place, the court must agree on a solution that is fair to both parties.
The divorce lawyers handling the case will need to understand the makeup of the business, as well as the intentions of both parties in order to agree on a fair way forward.
There are four main routes that the parties can take.
Business as usual
Both parties can agree to continue co-running the business. This is only an effective solution if both parties are able to act civilly with each other, and can agree that there will be no negative implications on the business post-divorce. In many divorce cases, this isn’t a viable option, so other routes will need to be considered.
Split the business into two
This route is often only a suitable option for businesses with a specific structure. If there are already two existing commercial areas or trading divisions, then technically each party can take over one location. However, problems can arise if there are any internal shared resources, such as marketing or accounting.
Sell the business
Some couples may immediately wish to sell the business, tying up all loose ends and splitting the profits fairly. But in some instances, one party may wish to solely own the business, whilst the other is happy to let it go. The party retaining the business must pay off the other, achieved by having the business valued by external accountants. There are multiple ways to value a business so having at least two valuations completed with the assistance of a solicitor is advised.
If the party retaining the business cannot afford to pay off the other party, other assets can be used for negotiation. This may result in one party keeping the business, whilst the other retains the marital home. The court will take into account the possible implications of a deal such as this, considering any impact on the future earnings of either party, and whether pensions are tied up within the business.
Close the business
If the business has employees other than the divorcing parties, the court may be reluctant for the business to close, since the employees will be left without a job. Unfortunately, if no other route has proven viable, or if the parties involved are struggling to reach a fair agreement, there may be little other choice.
Better to be safe than sorry
When going into business with your partner, it’s important to prepare yourselves for the unfortunate. Some couples may see no need to consult a family lawyer whilst the relationship is going well, but having a business plan in place for the possibility of a divorce is vital should the marriage take a turn for the worse.
Think of it like an insurance policy: you take out contents insurance to protect your belongings from various instances, like fire or theft. You plan to never need to claim on the policy, but it’s reassuring knowing that it’s in place. It’s a similar idea for married business partners, preparing for the worst with the intention of hopefully never needing to refer back.
If you’re looking to start a business with your partner, or perhaps join your partner in an existing business venture, get in touch with a family lawyer today.
John Roberts is a Partner and Director of Austin Lafferty. John has been with the firm for almost 20 years, with experience in all areas of family law, including divorce and separation, adoption and contact.
