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Protecting the family business from life changes

Being in business is not easy, but when the impact of a relationship breakup or death is thrown into the mix, it can put the business at risk. There are a number of practical steps that can help try and limit the impact on your business.

For both advisers of businesses and business owners, sometimes steps might be taken early on in the business life cycle that unwittingly cause issues in the future. It is important to consider every business transaction with an eye on the people behind the business.

It seems like a simple tip, but it is often one that is missed, the first step is to make sure you have carefully drafted documentation reflecting who owns the business, and what the rights and the obligations of the owners are. Apply caution before putting shares in the name of a partner or spouse, or including them as a company secretary or director if they are not actively involved.

Commercial documentation and agreements

When preparing the articles, shareholder or partnership agreements, think carefully about whether the document considers the owner’s personal circumstances as well as those of the business. It is really important to road test scenarios to see whether the documentation does what it needs. Consider -what happens if an owner is going to get married or enter into a civil partnership, should they enter into a relationship agreement? What if they receive an inheritance? What happens if they separate? What happens if they pass away? Contested divorces, dissolutions or probate disputes are lengthy, costly and hugely stressful for those involved and have a negative impact on the family business.

Breakdown of a relationship

Relationship agreements can be a thorny subject, but they can also be a really good way of helping make a relationship healthy, setting out mutual objectives and intentions if the relationship breaks down. Nuptial agreements aren’t just for celebrities, they are also widely used by business owners. Whilst you cannot force anyone to enter into one, you could include a provision in the company documents that requires a partner or shareholder to enter into a nuptial agreement if they get married. This could help the owner take the emotional sting out of the initial conversation with the future spouse or partner.

The company documents can also include pre-emption provisions which prevent shares being transferred to a spouse or partner, or requiring that the shares must be offered for sale to the other shareholders first. Consider also including a discount for valuing minority shares.

Not only is having an ex-partner involved in the business likely to create significant issues if the relationship breaks down, if they are employed by the business, then if you separate it is not as simple as asking them to walk away. They may have rights as an employee and so any departure needs to be handled correctly or could result in claims for unfair dismissal. It can also severely impact on staff moral if there is a family dispute or troublesome person you cannot exit from the business. Think carefully before you involve a partner or spouse, particularly if they are not going to be actively involved.

When unmarried, if you separate, the assets are divided according to who owns what. Once you marry or enter into a civil partnership, all assets will come under the spotlight. If you have a business before you get married, or are embarking on a new business venture with cash you have brought to the marriage when you are already married, think about entering into a nuptial agreement to seek to ring fence the business and to try and limit claims. Nuptial agreements, which are drafted fairly and meet certain criteria, are likely to carry significant weight and will help put the brakes on a claim, which may help protect the business from being broken up.

Keep the business separate from everyday family finances. If the business was created before the relationship, but you later inject cash from joint resources, you may come into difficulty persuading a court that the business was a pre-relationship asset, which may otherwise be able to be treated differently. 

Estate planning

Estate planning also forms part of effective asset protection if the relationship breaks down, so think about your objectives and whether that is to save assets for future generations, as well as effective tax planning. There may be things you can do with trusts and family investment companies to help protect assets for the future generations.

Finally, make sure that the owners of the business have a carefully drafted will reflecting what would happen to their business interest if they pass away. Will there be a mechanism for valuing the business to buy out the spouse or partner’s share? And consider what will happen if the business owner loses capacity. A lasting power of attorney is a must for all business owners.

Whether it is death, dissolution or divorce, the implications on a business can be catastrophic, so careful planning and specialist advice early on will help.

For any more information please contact Samantha Newton from our Family Team on s.newton@ashfords.co.uk or Andy Braithwaite from our Commercial Team on a.braithwaite@ashfords.co.uk

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