Before addressing business owners and pre-nuptial agreements I felt it may be helpful to revisit some of the general principles that apply in relation to pre-nuptial agreements.
What is a Pre-Nuptial Agreement?
It is an agreement between two people about to get married/enter a civil partnership which sets out what they want to happen to their finances if the relationship breaks down.
Are they legally binding?
If they are fair and certain safeguards are followed then there is a high probability that the Family Court will respect the terms of the agreement. However, the Family Court does not have to impose the terms of the pre-nuptial agreement and can vary it if it feels the circumstances warrant this.
I own a business, why should I consider putting in place a pre-nuptial agreement?
Businesses can present a number of difficulties when resolving financial claims following a separation. The issues that arise are typically although not exclusively, related to private companies such as:
- Ownership – for example, the business is mine and my spouse/civil partner should have no interest in it. Depending upon how a business has been treated during the relationship, when it was started, the involvement of both parties and a number of other factors, it is possible that a business may be treated as an asset that a Family Court would consider should be shared when dealing with finances.
- Value – What is the value of the business/shareholding? This can be a really difficult question to answer and often expert evidence is required from an accountant to address this question. In our experience, the results of this often leave both sides unhappy. The person who has the interest in the business may feel that it has been overvalued and the person who does not have an interest in the business may feel it has been undervalued.
- Uncertainty – The value of the business can fluctuate or is uncertain? When a value is assigned to a business, certain assumptions are normally made based upon historic performance. However, businesses can be hit by a number of unexpected circumstances/events. This means that the value of a business is more likely to change than say a residential property. This is, therefore, a problem in comparing business assets to other types of assets when working out how finances should be dealt with.
- Agreement – How should the value of a business be treated in an agreement?
It is all very well assigning a value to a business but a value assigned to a business is not cash that can be used as a deposit to allow someone to buy a house, for example.
That does not mean that the value of the business should be ignored as often businesses are the source of income for one or both parties. Therefore, it is not practical to sell it. If that is the case then consideration needs to be given as to how assets are divided to make sure any agreement is sustainable.
Ok, so I am aware of why I should put a pre-nuptial agreement in place, but how can it actually help me?
A carefully considered pre-nuptial agreement can address the issues highlighted above and look at the role of the business, the wider context of the family finances, what future provision is needed and, as a consequence, what is appropriate regarding the business if the relationship breaks down.
At a time when people are entering into a pre-nuptial agreement, communication is generally better than at the time when the relationship is coming to an end. This means that whilst these conversations are still challenging, both parties tend to be more receptive to listening to each other’s point of view. There is more motivation to reach an agreement which both parties are comfortable with in order to ensure that the relationship has a positive start. In contrast, upon separation, the natural reaction of many people is to want to protect themselves. As a result, it is often harder to reach an agreement at the end of the relationship than it is at the beginning.
If you own a business and are considering putting in place a pre-nuptial agreement please get in touch to speak to our specialist solicitors.