News that Bill and Melinda Gates are divorcing has focused largely on the likely division of their huge personal wealth, with less said about the future of their various joint ventures, like the Bill & Melinda Gates Foundation.
Family businesses generally succeed through a sense of unity, cooperation and family ties. But when those family ties weaken, the impact on a family business can be as devastating as it is for the individuals concerned.
Relationship breakdown can prove particularly tough if the business is run by a husband and wife, as with the Gates Foundation, especially if they are joint partners in the company. Research from 2018 reported around 1.4m UK companies are run by couples, with the number on the rise.
If a couple own and run a business, both will understand the other is entitled to some benefit after divorce, but many business owners remain unaware their partner could be entitled a share of their business, even if they were never involved in its day-to-day running. This outcome is also more likely with longer marriages or a significant inequality in financial resources.
Divorce can be bad for business
A divorce process that involves a family business can be complex, with its valuation, inheritance wishes, financial contributions, dividend payments and the shares or interests of other family members, just the start of what is typically a long process.
Common issues arising from divorce involving business owners include:
One partner changing the business before announcing their desire to divorce
Disputes over the future of the business
Disagreements concerning the business value and potential sale
Disputes about who contributed what to the business
Disagreements about any restructuring after divorce
The courts will try to protect a family business from being too involved in any divorce, hoping to avoid the business having to be broken up or sold off to release capital to pay the court determined settlement.
However, whilst the courts are reluctant to approve any settlement which could ruin a family business, they do have the power to order a sale in extremely rare circumstances, which should be borne in mind.
Alternatively, one of the couple may need to buy out the other’s share in the business, or liquidate assets to achieve the same result, all of which can become complex and time-consuming. It also risks negatively impacting the performance of the business with couple’s attention elsewhere.
Also, few businesses have the spare capital or assets to liquidate to achieve a clean break and the resultant pressure to sell will typically signal the end of the business, unless an amicable split is possible, as hoped for Bill and Melinda.
Divorce doesn’t necessarily mean going to court, and family mediation, especially in connection with family-owned businesses, makes a lot of sense. A negotiated settlement will typically be quicker, cheaper and far less emotionally draining than relying on the court to resolve matters.
Collaborative Law is an excellent option for spouses who are joint business owners, as the negotiations are handled face-to-face rather than through lawyers’ letters, with a focus on guiding the arrangements forward amicably. This gives the best chance of preserving a working relationship as business partners, even if the marriage is over.
And remember, divorcing partners will often have to work together and make jointly beneficial decisions until the business can be sold and that presents a lot of challenges, if the best sale price is to be realised.
Protecting a business from divorce
The first step to protecting a business is not particularly romantic and requires foresight to draft appropriate documentation, which typically takes the form of a pre-nuptial agreement. Admittedly, not the easiest topic to raise when a relationship becomes serious.
It is perhaps surprising to learn that Bill Gates did not decide to enter in to a pre-nuptial agreement with Melinda, despite being the youngest American billionaire when they met.
A pre-nuptial agreement is not just about the relationship between the owners, but the future of the business, its reputation, the livelihoods of its employees, any investors, its clients and even its customers.
A Founder’s Agreement is a good place to start and sets out formally how the founders of a business will operate it, hoping to avoid any disputes or misunderstandings which could threaten it in the future. In the UK this formal document will typically be in the form of a Shareholders Agreement.
Act now before it happens
Discovering a business does not have the correct agreements, when the divorce lawyers are valuing it for sale, will only add to the pain of divorce. Preparing in advance does not make relationship breakdown inevitable, but will ensure a more amicable divorce, if it ever happens.
You might own all, part or none of a family business, but knowing which direction your next step should take you in the future, requires first knowing where you are now.
Divorce is naturally an emotive subject, but experienced family lawyers will work hard to understand their client’s perspective, advise them quickly and cost-effectively, to help them avoid ending their marriage in court, if at all possible.
For more information, particularly on the Collaborative Law option, contact Ben Twitchen on 01582 714609 or email firstname.lastname@example.org