Why prenups could be a smart move for entrepreneurs

Legal view By Elspeth Kinder

Despite a certain amount of stigma and the negative connotations associated with prenuptial agreements in the UK, business owners considering marriage would be wise to ensure they have a well-drafted prenup in place.

There should be no shame in planning for what would happen to your business assets in the event of your marriage ending – this is very different from anticipating your marriage ending and is a sensible step to help protect your company. That’s because the unfortunate truth is that businesses are indeed put at risk in the event of a divorce.

In this post, we will explain what could happen to your business on divorce, and considerations you might want to take into account to protect your business interests.

The risk of divorce to your business

Businesses are taken into account on divorce, just like any other asset. Depending on the situation, a business or a share in a business could be included as part of a financial settlement.

This happens regardless of when the business was established. Even those who set up a company many years before meeting their spouse are not exempt from the value of the business being taken into consideration in a divorce.

Kinder: preparation worth the effort

In assessing whether or not your business (or assets equivalent to its value) should be shared will depend on (1) whether this value is required to meet the needs of the parties or any dependent children and, if not, (2) whether it is a ‘matrimonial asset’.

The courts will consider when the business was established (before, during, or after the relationship), potentially analysing the value of the business at the point the parties started living together, assessing any increase in value over the course of the marriage and to what extent the business has become a shared financial resource. As in all cases, the court will also take into account the length of the marriage, including any “seamless” cohabitation beforehand. Typically the longer the marriage, the more difficult it is to argue that pre-acquired assets such as a business should be excluded from a financial settlement.

How to protect against the risk of divorce

Although a prenuptial agreement is not literally a binding contract a well-drafted prenuptial agreement is very likely to be upheld. A prenup is unlikely to be challenged successfully if both parties entered into the agreement willingly, understanding what they were signing up to, and there are no factors that would make it unfair for them to be held to the terms.

If you are thinking about a prenup to help protect your business interests, there are a number of things you should consider:

  1. Maintain records of your business finances

Make sure you keep a paper trail that details the financial position of your businesses in which you’re involved to ensure the courts can accurately and comprehensively assess their value prior to, and during, the marriage.

  1. Be realistic about the proposed terms

Structuring an agreement to identify clearly any wealth, such as existing shares in a business, acquired before the marriage can be a sensible approach. The court may be more likely to uphold a prenup that has ring-fenced assets from before the marriage than one that seeks to hive off assets generated during the marriage. An agreement that purports to leave either party with close to nothing is unlikely to have much impact on divorce, unless they are genuinely financially independent in their own right.

  1. Review and amend your corporate documentation

Corporate documentation, such as partnership agreements or shareholder agreements, can be another effective tool in protecting the shares of a business from being transferred to a non-owning party such as a spouse. For instance, business owners could stipulate that all shareholders must first approve the transfer of shares to a spouse or civil partner in the event of a divorce.

Other businesses may go further, requiring that associates sign prenuptial agreements before they get married, or post-nuptial agreements if they’re already married.

Getting a prenuptial agreement right takes time and other legal steps may need to be taken alongside its formation. Rushing it or putting pressure on the parties involved can result in significant flaws in the agreement and could jeopardise its status as a prescription for dealing with finances on divorce.

A carefully considered prenuptial agreement is a hugely worthwhile investment of time and money, both as a wealth-protection strategy and to reduce the uncertainty and expense that can come with determining a financial settlement at the point of divorce. Speak to a specialist solicitor about your options as early as possible.

Elspeth Kinder is Partner and Head of Family Law at JMW Solicitors