Divorce and the SME: could you lose your livelihood as well as your love life?


Date: 13 October 2009

With most small businesses being family firms, it's a surprise that divorce isn't mentioned more often as something of a business risk. What would happen to you and the company if your marriage broke up? Following the recent trend of courts handing out huge payoffs to housewives and husbands alike, could you lose your livelihood as well as your love life?

English courts used to leave family businesses out of the equation when totting up the assets of failed marriages – not any more. Now they try to keep the business in the family if it produces enough income to keep two households reasonably comfortable. But if it doesn't – or a warring husband or wife objects – the business will be included amongst the assets to be divided between them.

The courts take the view that, where one partner in a marriage builds up a business, and the other maintains their home, the home-maker's support may be equivalent or "nearly equivalent" in value. Even where judges are not prepared to go that far, they are likely to value the home-maker's efforts much more highly than his (or, more likely, her) partner does. And in that case, even if the stay-at-home wife/husband had zero involvement with the "family firm", he or she can still effectively force its sale.

Circumstances that make selling the business more likely include:

  • a long marriage – anything over 11 years counts. However, home-makers of less than five years' standing have been given big shares of the joint assets when other factors (see below) have been involved
  • where the home-maker has sacrificed their career to support the business-builder
  • where children, or other family responsibilities, have fallen on the home-maker
  • where one or both of the parties has suffered severe illness, redundancy, bankruptcy or a crisis in which they relied heavily on their partner.

However, some marital events make a sale less likely:

  • if the business produces little income now and has poor prospects, or if the income depends entirely on the skill and presence of the business-builder
  • a short marriage
  • a pre-nuptial agreement (they have no legal standing in England but the courts are likely to take them into account if they were properly handled).

If you are faced with a split, you can take precautions to get the settlement right and fair. Start by valuing the assets you brought into the marriage – professionally, if you think they are substantial. If you are an employer, that includes your business. If you are a one-man band and expect to stay that way, don't bother. What you gain on the roundabout you'll lose on the swings. The longer the marriage goes on, the less useful the valuation will be – but it might be handy for a sudden break-up.

While you are arranging this valuation, try to reach agreement on how the business will be valued thereafter, and reach an agreement on the business value with your spouse, which should at least remove one source of argument. Do not lie about how much the business is worth; your spouse, or even the Court, will see it as a duplicitous attempt to short-change, and take a hard line.

Try to build up assets outside the business during the course of the marriage – you can sell them if needs be, rather than lose the business. Consider holding a substantial part of the business's assets in cash or other easy-to-reach ways; again, if necessary they can be released to fund the settlement. There are other, though less straightforward, alternatives; seek advice.

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