Divorced from reality: The impact of separation on business

Divorce is one of the most commercially disruptive events a business owner can face, yet it is rarely treated as a material financial risk, writes Anne-Marie Hamer, partner at law firm Spencer West LLP

With over 5.7 million private sector businesses operating across the UK, many of them owner managed, the financial consequences of divorce are far reaching.

While business owners routinely plan for economic uncertainty, regulatory change, and succession, far fewer consider divorce as part of their wider risk management strategy.

Disclosure and valuation

During divorce proceedings, businesses are normally considered marital assets. According to the Matrimonial Causes Act 1973, these assets must be fully disclosed and may need to be valued by an expert or a Single Joint Expert (SJE) appointed by the court.

The court’s main aim in divorce is to achieve a fair outcome. This can place businesses and its record keeping under intense scrutiny, while the court considers all the factors in divorce.

Divorces are looked at holistically. It is relevant whether the business commenced prior to the party’s relationship commencing, or indeed post-separation. Similarly, whether the spouse has had any involvement in the business on a day-to-day basis as an employee or advisor or even whether they took a creative role in the business in its growth or deterioration.

An honest assessment of the spouse’s involvement, backed by disclosure of company records, is central to the court’s endeavour to achieve a fair outcome.

Early intervention is critical

Outlining who the controllers, shareholders and lay investors of the business are is a first step, together with full disclosure from the client, such as the past three years of accounts, profit and loss statements, bank accounts, and tax returns and expenses.  Identify any gaps in the disclosure and consider the timeline of the business from inception to the present day. 

Pre- and post-nuptial agreements

While pre- and post-nuptial agreements are not binding in law in the UK, they are persuasive – and are becoming more so. Such agreements can define the intentions of the parties at the time they were prepared, agreed and duly signed.

Contacting a legal expert as soon as possible is important to make sure all the factors exist in the agreement, so they are less likely to be challenged at a later stage. Both agreements must be fair.

Business setup and separation of business and personal interests

It is usual practice for the court or parties to instruct an accountant for a business valuation and ask for commentary on liquidity and the parties’ maintainable earnings. These factors can have a significant impact on a judge’s conclusion in dividing the property pool.

The mixture of business and personal interests is a common and avoidable pitfall. While married couples may have every intention of a long-lasting relationship and consider tax-efficient combinations of salary, dividends or loans, it is best to keep a clear record of this activity and its intention.

Companies set up and run with strong governance and financial transparency in place are ultimately better off to deal with the pressure of divorce.

How business owners can protect their position

1. The use of pre- and post-nuptial agreements offers one way to protect business interests. Such an agreement can clarify the business as separate property prior to marriage and identify its value and factor in how any future appreciation can be valued, thus potentially limiting the spouses access to its value and funds;
2. Consider the legal structure of the business and how you can protect vulnerability, by considering the use of an LLC or corporation, which will create separation between the personal and business assets, enabling the business to be shielded from divorce proceedings. Irrevocable trusts are another option, which can further protect the business interests;
3. Consider the need for separate bank accounts, so there is no amalgamation;
4. Consider recording your wishes in a will;
5. Record key decisions, and the associated rationale surrounding salary and distribution policies, and loans within company minutes.

The lines between professional and personal are difficult to separate, but well-documented records, full and frank disclosure, and a clear picture of individual and professional circumstances will help to reach a fair outcome.