Is your Pre-nuptial Agreement strategic business risk management?
4th July 2022 by Jonathan Talbot
Managing risk is an essential part of any business operation and while personal relationships do not often appear high on a business risk register, an acrimonious divorce has the power to devastate a small business.
‘While few anticipate or want to believe their own marriage will break down, sadly recent statistics show that over a third of all marriages will end in divorce,’ says Jonathan Talbot, Head of Laceys Family Department. ‘It is not uncommon for directors of a family business to insist that members of the next generation enter into a Pre-nuptial Agreement before they get married, in order to protect the business assets from the effects of a divorce.’
It is sensible for all entrepreneurs to consider a Pre-nuptial Agreement if they are thinking of getting married or entering a civil partnership just in case the relationship does not last. This provides important protection for any assets which have been built up prior to the marriage.
What impact can divorce have upon your business?
It may be necessary to agree a financial settlement as part of a divorce, with the wealthier spouse often having to provide for the economically weaker party. This may involve paying a significant lump sum, for example to purchase a property, or ongoing financial maintenance. Either situation can put a strain on a business if this is the sole source of income or if capital is tied up in assets of the business.
Alongside the financial concerns, a divorce can have an impact on partners or other shareholders, family members and employees who rely on the business. Sometimes a couple may work together, or one may be an employee of the other; each scenario bringing its own complications. Divorce can be a stressful experience for anyone, but when it is also linked to your means of livelihood this can only add to that the stress.
How is a business considered within the financial settlement?
A business is an asset which, like any other, will be taken into account during the calculation of the financial settlement. Your business may need to be valued, usually by an independent accountant. This will involve disclosing business accounts and assets to the independent valuer.
Once a valuation has been placed on your business then it will be considered as part of the overall matrimonial pot, which needs to be shared fairly.
Fortunately, the courts recognise the importance of enabling a business to keep trading, and if possible to allow businesses to continue to trade. This then means that other assets may need to be traded off to enable one party to keep the business.
How can a Pre-nuptial Agreement protect business owners?
A prenuptial agreement allows you to set out in advance how your business assets should be treated in the event of a divorce. It may be that you wish for the entire business to be considered separately from the other marital assets, or that you specify a certain interest or capital which would be due to your spouse should you divorce in the future. We can advise you on what is a realistic division of your business depending on your circumstances and what other assets are held.
A Pre-nuptial Agreement can also cover how a business would be valued in a divorce; what, if any, percentage interest your spouse would receive on divorce; and how that should be calculated. For example, you may want this to cover only growth during the period of the marriage and not prior to marriage or after separation.
What type of business assets can be covered?
A Pre-nuptial Agreement can cover a range of business assets, such as cash in the bank, property, land, machinery, equipment, vehicles, intellectual property, stock, artwork and furniture.
Any income stream that you receive from your business will need to be given careful consideration when considering your Pre-nuptial Agreement. If your business income is used to fund the family lifestyle, then reasonable provision will need to be made for your spouse in the event of a divorce. Failure to do so could risk the Pre-nuptial Agreement being found invalid.
How can I obtain a binding prenup?
In England and Wales, a Pre-nuptial Agreement is not yet legally binding, but since 2010 courts in England and Wales have shown that they are highly likely to enforce the terms of a Pre-nuptial Agreement provided certain conditions are met. These conditions are to ensure fairness and include:
- you and your spouse must obtain independent legal advice on your rights and the implications of the proposed prenuptial agreement;
- you both must make a full disclosure of all assets and liabilities held;
- the prenup should allow for future family changes, such as what will happen if/when children arrive; and
- neither of you must have been unduly pressurised into signing
- It should be made at sometime in advance of the marriage usually 28 days.
Bearing in mind the above it should be a well thought out Pre-nuptial Agreement that both spouses have had adequate time to consider. An agreement in the run up to a wedding day, with all the emotion at that time, is more likely to fail in court as one or other spouse was under undue pressure. Seeking early expert advice is a good idea to minimise your business risk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.