Going through a divorce can be a difficult and emotional experience even if it is an amicable decision, but add in a family business and it can become a lot more complicated.
In this blog I reflect on what I learned from my discussion with Zahra Pabani from Irwin Mitchell, we discuss divorce and the family business and what you might want to consider when it comes to your own family.
When you first enter into a relationship, whether that is a business one or a personal one it may seem ludicrous to be thinking of what would happen should the relationship end. It perhaps isn’t practical nor particularly romantic to start discussing division of assets etc at the end of the first date!
However, considering ways in which a relationship can end and making plans to ensure that your or your family’s assets, including the family business, are protected is both sensible and likely to help avoid unwanted consequences.
This doesn’t have to be restricted to divorce. Death, loss of capacity etc are other scenarios to consider (as covered in the recent ‘Lifeboat Drill‘ episode) but as the focus of this episode is divorce and the family business, we will focus on that scenario.
If you are already in a relationship and decide to start a business with your significant other, at this point I would suggest that discussions are held around what happens if the relationship ends. Many are tempted into holding business assets as 50:50 shareholders for tax reasons and for reasons of ‘fairness’, however if the division of responsibility and involvement is not equal it may not be fair to divide the business 50:50 at outset.
Saving some tax in this way can seem advantageous in the short term but if the relationship ends and a 50:50 split of ownership is not an accurate reflection of how things are the cost to resolve this may be far higher than the tax savings.
Zahra talks us through the options that are available to protect your assets. There are some ways to ensure that your assets are protected in the event of a relationship breakdown.
Listen to the episode here:
We look at the role that a ‘living together agreement’ can play when deciding to move in with someone. This is entered into on the understanding that should the relationship end, that the living together agreement defines how certain assets would be divided.
One of the other ways in which you can protect your assets is by agreeing to a pre-nuptial agreement, often shortened to a ‘pre-nup’. This is a way to formalise and legally set out how assets are to be divided on divorce prior to the marriage starting.
Again you may feel that it is not particularly romantic to start talking about pre-nups when you are planning the rest of your lives together but as Zahra points out more and more people who have been negatively impacted following one divorce are opting for pre-nups should they re-marry.
If you are already married and haven’t got a pre-nup in place you are able to use a post-nuptial agreement or post-nup to outline how you both want assets to be divided in the event of a divorce. They work in the same way as a pre-nup but are put in place after the marriage has started.
The point of all of these agreements is that they are entered into when things are going well in the relationship. They are a kind of insurance policy that helps to avoid additional conflict at the time of relationship breakdown and because they are entered into when things are going well they should be considered as final by all parties at the time of a relationship breakdown. This doesn’t mean they aren’t challenged but if advice is taken when putting them in place and they are drafted in a way that is fair, they should be robust.
Note that I have called this section ‘Should you work together post-divorce?’. Both Zahra and I agree that there are not likely to be many circumstances where this is a good idea. It may seem as though this is the case if your working relationship remains strong despite the end of the romantic relationship, however you may also need to consider what impact remaining in business with your ex spouse would have on future relationships.
If you still want to remain in business with your ex, there are businesses that have done so successfully. Patricia Cole and Kit Johnson interviewed 9 copreneurs who have successfully remained in business together and they were able to identify that the following needed to be in place for this to work successfully.
So whilst it may not be recommended, it is possible and can work if the above are all present.
I am a Family Law Partner at Irwin Mitchell, working as part of the national team and support clients in the UK and internationally.
My aim is to put my clients at the heart of everything I do and deliver a bespoke service with commercial and emotional intelligence at its core. With over 20 years’ experience, I’m ranked as a Tier One lawyer by independent legal guides such as in Chambers & Partners and Legal 500. I strive to always achieve excellence for every client, in every situation.
I support individuals and business people and specialise in dealing with financial settlements for high net worth clients with a specific focus on wealth protection. I achieve positive outcomes in and out of the court room and work collaboratively.
I’m regularly instructed to deal with pre and post nuptial documents, complex children matters, as well as Living Together Agreements in cases of extreme wealth. This experience allows me to find positive solutions in any number of challenging situations.
Whether you’re going to Court or need to negotiate a settlement, I’ll help you find the way forward. With a strategic approach and direct, straightforward advice, I’ll work alongside you to achieve the very best outcome for you and your family.
No case is too big or too small, I’ll be on your side and will guide you through the legal maze of family law.