Any relationship involving more than one person is complicated. If you are in business with other people, be it your spouse, other family members or a non-family member, a marriage breakdown involving any of these stakeholders will affect the business.
Taking the time now to address potential issues arising from a marriage breakdown that may affect your business in the future can save you a lot of stress, time and expense.
Put in place a buy-sell Agreement
Businesses involving multiple parties should have a governing document that tells stakeholders what happens if a particular event occurs. Sometimes this is a partnership agreement or a shareholders’ agreement.
In addition, Buy-Sell Agreements (BSA) can be used by partners in a business to give the parties to the agreement the option to purchase another partner’s interest following certain agreed trigger events, usually the death or incapacity of a partner, but also divorce.
In the case of divorce, a BSA can give the other partners an option to purchase any shares or membership interests of a divorcing partner that would otherwise pass to their ex-spouse. This prevents ownership interests or voting rights in the business from being transferred to an uninvolved ex-partner.
BSAs commonly allow for vendor finance, giving the other partners the option to pay an ex-partner for their share of the business gradually, rather than having to come up with full funding right away. Having a contingency plan like this to cover the cost of a partner’s share gives the other partners enough time to pay for the shares, especially if not covered by insurance.
A BSA will also provide a method for valuing the interest to be transferred, this could be market value determined at the time of the event or an agreed value decided by the partners.
Make a binding financial agreement (i.e. prenup/postnup)
For businesses involving family members, Binding Financial Agreements (BFA) can be a useful tool for determining who gets what assets in the event of a relationship breakdown. A BFA can be made before or after getting married or by partners in a de-facto relationship.
A BFA is not an acknowledgement that your relationship will fail, but rather an agreement that clarifies any uncertainties relating to the parties’ interests in the business. For example, you may be involved in a multi-generational family business that not only you, but your parents and siblings rely on. You can use a BFA to exclude the assets of the family business from any division of martial assets in the event of a relationship breakdown between you and your spouse. This protects not only you but the business your family took generations to establish.
If, on your marriage, your partner joined the family business, the BFA can stipulate that only the value added to the business after the commencement of your relationship will be a marital asset subject to division in a separation. You can also agree to cap the amount your ex-partner can claim against the business in the event of a relationship breakdown. For example, the BFA can specify a spouse may only receive 20% of the business’s value accumulated during the relationship.
For a family business started, owned and operated by you and your spouse, your BFA can stipulate how the assets of the business are to be split. This could be a simple 50/50 split or shares in whatever portion each spouse has contributed to the start-up and ongoing management of the enterprise. Either way, it records your agreement in writing so there is little room for argument in the future. Your BFA can also dictate how the business will be valued at the time of separation. This helps prevent disagreements over a value should one spouse hope to buy out the other’s share.
Discussing a BFA can be a very emotional subject and you must consider how your intentions may be perceived by your spouse. If you decide to enter into a BFA, each party to the agreement must have their own independent financial and legal advice about the effect of the BFA and its advantages and disadvantages.
Maintain good business operations
Keeping clear financial records for your business can be immensely helpful in the event of a relationship breakdown. A paper trail detailing the various sources of capital and other contributions to the business and contributions by either party can be used to prove what assets, if any, of a business should form part of the marital asset pool. Efforts must be made to maintain records of the sources of income for the business (what existed before the relationship, what has been raised since the beginning of the relationship).
If your partner has had any involvement with the business, you will need to clearly outline and prove what they have contributed. If they have assisted in the family business but are not an owner, it is important they are paid a market wage for their work and that this arrangement is documented by a formal employment agreement.
It is essential you keep your business and personal expenses separate. Mixing your personal expenses through your business can call into question your actual income and risk dragging these commingled funds into your divorce settlement.
Take these steps now
By far the best thing you can do for your business to protect it in the event of a separation is to deal with these issues now. Leaving these crucial decisions to be made at the time is highly likely to give rise to disputes. Separation proceedings can be lengthy and expensive at the best of times and catastrophic when it involves business relationships and business longevity.
Not planning for a relationship break down leaves your business assets vulnerable to litigation where the outcome of your asset division will be in the hands of a judge and not yourself.
