Married business partners face a number of options should they decide to divorce, explains JOHN ROBERTS
It isn’t uncommon for married couples to enter a joint business venture together, but unfortunately, it is also common for a marriage to end in divorce. When you’ve built a business from the ground up with your partner, what’s to come of the company after the relationship breaks down?
Under the Family Law (Scotland) Act 1985, the ‘net value of matrimonial property’ should be split fairly between both parties in the event of divorce.
A business is an asset, regardless of whose name the business is in, or which party owns a larger share: if the business was started after marriage, or restructured to accommodate the other party after marriage, then it is a marital asset and must be dealt with as such.
A pre-nuptial agreement (pre-nup) is an agreement made and signed, often prior to marriage, stating which partner has ownership of certain assets throughout the marriage and in the event of divorce. Not everybody is aware that a pre-nup can be put in place at any point throughout the marriage, and is advised for couples who are starting a business together. Obviously, no couple expects their marriage to end in divorce, but it can happen, and when it comes to a business, it’s always better to be prepared for the worst.
Without a pre-nup in place, there are a few avenues that divorcing couples can consider when it comes to their joint business.
Business as usual
Although the marriage may be ending, not all partners feel the need to cut business ties. For some, they can civilly facilitate joint ownership of the business after the divorce. This is, of course, not a viable solution for everybody and it takes a certain type of person and certain type of relationship to make it work.
Splitting the business
If both parties wish to keep the business but do not wish to associate themselves with the other, splitting the business can be a potential solution. Theoretically, it may be relatively easy to split the business if there are already two existing commercial areas or trading divisions, but there may be many central resources that are likely shared between the two, such as accounting or marketing. And of course the business premises needs to be thought through – do the divorcing couple really want to see each other every day? The reality of dividing business assets down the middle can be complicated.
Selling the business
Both parties can mutually agree to sell the business, materialising the asset and allowing the financial fruit of the sale to be split equally.
If one party wishes to solely own the business, they may pay off the other party. For this to occur, the business must be valued – usually by an independent third party. Valuation of a business is not an exact science, and different accountants may conclude a different valuation, so it’s advised to get multiple valuations and to use a solicitor to agree on a fair price.
If the party keeping the business cannot afford to pay the other, then other assets can be used for negotiation. For example, one partner may keep the business whilst the other keeps the marital home, but both parties must agree to this deal and the court will take into account any long-term effects there may be on either party’s earnings, or whether either’s pension is tied up in the business.
Calling it a day
If no reasonable arrangement can be decided between parties, the court may rule that the business must be closed. The court is often reluctant to do this if there are employees who would lose their jobs due to the business closing, but often, when no other agreement can be reached, it is the only viable option.
We’ve also read about high profile divorce cases between business power couples but no matter what the size or sector of your business, it is always wise to consult a family lawyer to discuss how the assets might be split in the event of a marital breakdown.
John Roberts is a partner and director at Austin Lafferty. He has been with the firm for almost 20 years, with experience in all areas of family law, including divorce and separation, adoption and contact.