For the owner of a business, there are few things worse than getting divorced. Whether your business interests are in partnerships, as a sole trader or shareholdings in private companies, they can all be seriously affected by a divorce – which, despite the statistics showing that more than a third of all marriages will end this way, is often not something people anticipate or plan for.
This issue came to the fore again earlier this year when Amazon founder Jeff Bezos and his wife MacKenzie announced they were to divorce, bringing his entire ownership stake in the company into question.
Of course, not many couples have business interests like the Bezos, but they are often of significant value. The big questions are, do they form part of the property of the marriage, how much are they actually worth, and could the divorce endanger your control of the business?
Is the business interest matrimonial property?
In broad terms, the Family Law (Scotland) Act 1985 defines matrimonial property as anything acquired during a marriage, whether it be in either parties’ name or in joint names, which was in existence at their date of separation (known as the relevant date). This excludes assets inherited or gifted to the parties by a third party.
If the business was acquired or commenced after the marriage but before the relevant date, it will be matrimonial property.
The matter can be complex, however, in a situation where a business starts as outwith the pool of matrimonial property but then changes its character or structure during the marriage.
This change could have the effect of converting a non-matrimonial asset into matrimonial property. A basic example would be a sole trader who held their business prior to marriage but incorporates their business into a company during the marriage. The interest in the company would be matrimonial property albeit that an argument could be put forward to try to mitigate the impact on the business owner.
A business can be restructured in many ways, with even simple changes to the shareholding structure of a company affecting how a business asset would be treated on divorce. The question of whether a restructure converts the asset into matrimonial property is not always straightforward. If a business owner is considering a restructure of their business, it is vital that they consider with their advisers the impact of that restructuring on how the asset would be treated on divorce.
Valuation of a Business
Valuing businesses is very specialised, particularly on divorce. While the accountant for a company can put forward an initial broad brush valuation of the business, generally an independent expert will be instructed to prepare a valuation with information and documentation provided by the company accountant.
Some things to consider
• A pre-nuptial or post nuptial agreement can be useful in getting the agreement of your spouse not to make claims against the business.
• Consider carefully if you wish to involve your spouse in the business. It may be tempting, particularly if you have been advised to do so for tax purposes, however their involvement will have implications on divorce both from an employment law point of view (if they are an employee) and a family law point of view if they have contributed financially/non-financially to the business itself.
• Where your spouse is a shareholder or partner in the business, if you have not put in place a shareholders’ agreement or partnership agreement and the personal relationship with your spouse deteriorates, then decision-making in relation to your business can become fraught with difficulties. We have seen situations where a disgruntled spouse who has an interest in the business can hold their spouse to ransom or prevent a sale of the business. Putting in place appropriate documentation “in the good times” can avoid issues if the personal relationship deteriorates.
• Business owners require specialist input in divorce proceedings – ensure you instruct a specialist family lawyer, preferably at a firm which can call on a corporate law specialist and an experienced forensic accountant.