Keeping your business strong through a marriage breakdown

Running a business with your spouse can be one of life's most rewarding and enriching challenges.

Building something together, growing it in tandem and turning a passion into something financially rewarding for you both allows you to complement each other's skills perfectly.

However – without coming across as too bleak – it's important to consider what should happen if your marriage were to break down.

This blog explores the common obstacles faced by business partners whose marriage has ended.

It outlines what can happen if the business is prospering but the marriage isn't, and what happens if you're in this situation and want to keep your business going.

Understanding what's at stake

Divorce is difficult enough for any couple. But if you're sharing both a partnership and a business venture, it can seem complicated and insurmountable.

Like many business owners and entrepreneurs in the UK, you might find yourselves navigating the complex webs of both family law and business law, which only grow in difficulty as they intertwine.

Whatever your dynamic in the business, it's only natural to wonder what'll happen to the business (and their roles within it) after you separate.

Fortunately, with clear communication and proactive planning, it's entirely possible to keep your business safe and protected as you wade through the testing times of separating from your partner.

Matrimonial property

The business structure (whether you're a sole trader, partnership or limited company) will be considered a "matrimonial property" if you set it up when your marriage was intact.

Even if only one partner's name is listed as the business owner, or if one party owns a bigger share of the business than the other, this rule applies. Who officially owns what isn't what matters.

Instead, the business's net value (i.e. the assets minus debts) should be shared fairly between the parties in a marriage. This typically means an equal share, unless special circumstances apply.

As such, you must factor this calculation into the financial aspects of your separation, as it can prolong a divorce process that normally takes eight months from start to finish when financial settlements and arrangements for children are included.

For comprehensive guidance on navigating the full divorce process, from initial application to final settlement, you can refer to information provided by specialist solicitors such as George Ide LLP.

Do we need to sell the business if we divorce?

Here's some reassuring news: divorce doesn't automatically mean the end of your business.

You have several options at your disposal and the right one depends on your business's specific structure, your circumstances and your financial position once you've separated.

• For instance, one spouse might buy out the other's share, allowing them to retain full control while compensating their ex-partner fairly.

• Alternatively, the business value could be offset against other assets – for example, one partner keeps the business while the other keeps a larger pension share or takes out a lump sum.

• Some couples choose to continue as business partners even after they divorce. While this may sound unfeasible in certain circumstances, it can work well if both partners separate amicably and hold roles so essential to the business that leaving would be detrimental.

  This is common in cases where growth plans are being enacted in order to acquire capital or attract an eventual buyer.

The importance of shareholder agreements

If you decide to remain in business together after your divorce, it's absolutely worth establishing a shareholder agreement.

This legal document will outline:

• how decisions are made

• what happens if there's a disagreement

• how either party can exit the business, if necessary

It's essentially a prenuptial agreement for the professional side of your relationship.

Even if you had a shareholder agreement before your separation, you'll need to review and likely revise it to reflect your new circumstances and make sure both of you feel protected going forward.

Getting the business valuation correct

If one partner is buying out the other, or if the court needs to make decisions about your business, you'll need a professional valuation from a forensic accountant. Specialist firms, such as Frenkels Forensics, can provide this service.

The valuation will consider all business assets, including (but not limited to):

• property

• equipment

• stock

• intellectual property (IP)

• machinery

• fleets of vehicles

For instance, if you run a property business, each physical unit needs to be valued individually.

If you're a manufacturing businesses, you'd need to carry out a deep assessment of your entire inventory, materials and finished goods. It varies from business to business.

However, business valuations can be complex, especially for service-based companies where goodwill and reputation carry immense weight.

The accountant will also need to consider:

• future earning potential

• existing contractual arrangements

• debts and liabilities, as well as the tax implications of disbursing, transferring or disposing of these sums

Taxes (including Capital Gains Tax)

If you're transferring shares between spouses as part of your divorce settlement, you must consider what this means in terms of Capital Gains Tax (CGT).

The spouse transferring their shares will typically be liable for CGT shortly after the transfer completes.

You need to factor this tax liability into your financial settlement to make sure everything is fair.

The key point here is that getting professional tax advice is vital. The timing of transfers, and their structure and quality, can dramatically affect what taxes you might have to pay, both individually and collectively.

Inevitably, the final settlement should account for all of the necessary costs and the process should be as straightforward and stress-free as possible.

Considering future earning capacity

One often overlooked aspect is the difference in future earning potential between business partners.

For example, consider a situation in which one partner stays with the business, while the other leaves.

If the departing spouse earned a significant salary and dividends from the company, their future income may be considerably less, especially if their role was specific to the company.

Courts will consider this disparity when determining fair settlements. The spouse retaining the business might need to provide extra compensation or ongoing support to balance this out.

Managing the interim period

Between separating from each other and finalising your financial settlement, you may need to continue running the business together, even if only temporarily.

This interim period can be awkward and challenging, but setting clear boundaries and methods of communication can make a huge difference.

Discuss what practical arrangements you can make:

• Would it make sense to work different days?

• Should business decisions require both signatures during this period?

• Who should be responsible for overseeing which clients?

Document these arrangements clearly, so disagreements don't escalate into conflicts.

If you genuinely can't work together during this time, you may need the court to make interim decisions about how the business will operate and each spouse's involvement.

Alternatives to court

Court proceedings can be costly, time-consuming and potentially damaging to your business, particularly if considered a matter of public interest.

Consider alternative dispute resolution (ADR) methods like mediation or arbitration. They can keep matters confidential and preserve your business's reputation while helping you work towards a fair agreement and separation.

Mediation in particular allows you to retain more control over certain aspects of the business. It also allows you to maintain a healthy working relationship if you choose to continue as business partners.

Moving forward positively

There's no denying that going through divorce is an emotionally testing time.

However, in the interests of keeping work and home lives separate, approaching your business arrangements strategically can help you protect what you've both worked hard to build together.

• Seek early advice from solicitors who are experienced in handling divorce cases as well as business law disputes.

• Try to keep a transparent, collaborative dialogue going about your priorities.

Your business itself doesn't have to be another casualty in the fallout of your marriage. The end of a marriage doesn't always mean the end of a successful business.

With thorough planning, professional advice and a commitment to being fair, you can emerge from this challenging situation with your business intact and positioned for growth, even if that continues with you no longer married.

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