Divorce can be messy at the best of times but things become even more complex when business interests are thrown into the mix. Trying to detangle the two parties from the business and each other can cause a headache when it comes to separation. 

Partners in business and in life

It’s not unusual for a married couple to enter a joint business venture, the structure of which could be a simple partnership or a limited company. It’s also not uncommon for one party to join the other in an existing business venture. For example, one party may already own and run a successful business, so they often restructure during the marriage for tax purposes. This could take the form of allotting shares to a partner or making a partner a director in a limited company. 

What couples fail to consider is the consequences of these changes if the parties separate. Rarely do couples consult a family lawyer at this stage to take account of the likely effect of such changes in the future, should the relationship break down. 

What is the legal starting point?

The Family Law (Scotland) Act 1985 states the ‘net value of matrimonial property’ should be shared fairly.  This extends to shareholdings and business interests in companies.

This means that a business is an asset, like any other asset such as a bank account and if that business was started after marriage it will be classed the same as any other asset - much like a sofa or set of kitchen knives. It doesn’t matter if the business is in the name of one of the parties or both parties or even if one party owns a greater share of the business than the other - the law states that it should be split fairly. If it started prior to marriage and was subsequently restructured after marriage, it may come to be classed as a matrimonial asset too.

Can the business survive beyond the marriage?

The divorcing couple and the lawyer will need to address two key issues: 

• If the couple is fighting to get out of the family home, is it even possible for the parties to continue trading under the same business roof after separation? 
• Is the business capable of being split? 

There may be more questions than answers initially but fact-finding, understanding the makeup of the business, then discussing the intentions of the parties, and trying to agree on a way forward is the methodology used by divorce lawyers. 

In short, there are four main options for divorcing couples that run a business together:

• Continue as you were
• Splitting the business
• Selling the business to a spouse or a third party
• Closing the business

As you were

Just because the marriage is ending, doesn’t mean the business needs to end.  Careful consideration of the type and structure of the business needs to be looked at and parties need to discuss if the business can continue as a business despite being no longer part of the relationship.  

However, if both parties have been working together for a while and the split is not acrimonious, it may be possible to continue a fruitful business relationship.

Splitting the business

If both parties agree then it may be possible to split the business equitably. However, even if this is the couple’s preference, the reality of dividing business assets down the middle is complicated. Even if there is a natural way to make a split, such as between two commercial areas or two different trading divisions, most businesses share some central resources such as accounting, marketing, and premises to name but a few. While a split may be possible, it may not always lead to two independent and viable businesses.

Selling the business

If a spouse wishes to solely retain the business and continue to trade, then they will need to pay off the partner who is resigning. This means that a fair valuation will need to be agreed upon but this is often easier said than done.

The valuing of a business at the relevant date (date of separation) is as much a science as it is an art.  Often forensic accountants are instructed and in many cases, the valuation by two different accountants will give two strikingly different valuations. Solicitors can help ensure a fair price is agreed upon before progressing with the payoff.
However, if one partner is taking over the business, it leaves the other to potentially set up an alternative, or even a competitor business. How this affects the original business needs careful consideration.

If a spouse cannot afford to pay off the other party then there are two further options. 

The first is that other assets are used in the negotiations - for example, one party may retain the family home and the other the family business. Solicitors will also need to consider how this impacts future earnings and if either party’s pension is tied to the business.

The second option is that the business is put up for sale and sold to a third party to materialise the assets in order for them to be shared between both parties.

Closing the business

Businesses can be large or small, be making large profits or significant losses, have no employees but the spouse, or maybe a large multinational with many members of staff. Despite the fact that businesses come in all shapes and sizes, it’s true that whatever their makeup, a court will generally be reluctant to grant an order that will involve a business closing and staff finding themselves unemployed. However, if the two parties cannot come to a reasonable arrangement, there may be no other way for the couple to move forward and achieve financial independence. 

Prenup 

A prenuptial agreement, or prenup, is an agreement entered into by a couple that sets out how assets will be divided if they divorce or the marriage is dissolved. This can be written to include any business interests of either party. However, what many couples don’t realise is that it can be entered into during marriage and is an effective way for one party to protect the business. It may of course be a rather difficult conversation at that stage but it is certainly a lesser-known option that may prevent future conflict.

Business interests need to be considered closely when getting married to take into account the prospect of separation in the future. The same should be considered if a business is being restructured, as failing to do so can lead to difficult lessons being learned.
 

If you still have any questions about the divorce and separation process in Scotland our team of experienced divorce solicitors are here to help. We have a highly experienced team who have dealt with all aspects of separation and divorce in Scotland. 

Contact us to find out more about the divorce and separation process in Scotland or read our common questions about divorce online today.