By Joanne Gallagher, Partner in the Corporate & Commercial Team. Article first published in Spear's online 7 May 2013.
My husband and I have successfully been running a small family company for the last 5 years. We both gave up our jobs in the City and the revenue generated by the company is our sole source of income. We do not have any formal agreements between us as business owners - is there anything we can do or put in place now to govern what would happen to the company in the event of our divorce ?
Working out in advance how to maintain a family business during a relationship breakdown is important. Mixing business and personal life can be traumatic and expensive when relationships break down and parties want out. Many business owners do not plan properly for this type of situation, yet this could be a very real nightmare for business owners who have spent years building up a company.
Family Businesses are a key part of the UK economy. Figures published by Institute of Family Businesses show that there are approximately three million family businesses in the UK, employing over nine million people, contributing almost a quarter of total UK GDP and providing over £81 billion in tax to the UK government.
The impact of divorce in a family company can have devastating financial and emotional consequences for the parties concerned and those employed in the business. The reality is starkly illustrated by figures from the National Office of Statistics where it is estimated that at least 42% of marriages will end up in divorce.
For most family business owners, the business is probably the most valuable, but equally the most illiquid asset in the marriage, meaning that it cannot easily be sold or realised quickly without potentially a substantial loss in value.
Many people express surprise that divorced couples would choose to keep running companies together, given that things might not have worked out as marital partners. However when faced with the options of having to close the business completely, sell the entire business to a third party and split the proceeds, or raise money to buy the other partner out – some may chose to stay together for the sake of the company to preserve its value.
Particularly in these difficult economic times parties often realise they need each other financially, having a joint financial stake in a business or a joint venture is also a powerful motivator for couples to keep it up and running, even after their personal relationship has faltered.
It is a good idea to have a breakdown strategy agreed by the parties in advance to seek to minimise the financial and emotional turmoil caused by divorce in terms of avoiding destroying assets and preserving jobs that have been created.
The parties could have a detailed shareholders agreement drawn up. A shareholders agreement will set out the rights and obligations of shareholders of a company and commonly cover matters governing the management and structure, finance, administration and business activities. A shareholders agreement is a very useful document in this context as it can be used to provide a mechanism for setting out the principles upon which the parties will deal with unforeseen circumstances and contingencies such as divorce specifying how the parties will divide their responsibilities to keep the business running.
Alternatively the parties could consider entering into a post-nuptial agreement covering the business.
If the parties do not manage to agree in advance what the impact of divorce will be, and end up in a breakdown situation some parties chose to adopt a collaborative family law process. This is a relatively new practical way of dealing with family breakdown without court intervention. In the collaborative process each person appoints their own specially trained collaborative lawyer but all parties and their lawyers all meet together to work things out face to face. If one party goes to court, both lawyers must cease to act.
Business owners regularly insure against risk, the couple are right to take action now and start to consider what protective measures can be put in place to reduce the risks associated.