How Prenuptial Agreements Can Protect a Family Business

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How Prenuptial Agreements Can Protect a Family Business

If you have an interest in a family business, it is advised that you consider entering into a prenuptial agreement ahead of your marriage to set out clearly how that interest is to be dealt with upon divorce. Without a prenuptial agreement, your interest in the business, it’s value and, ultimately how it is to be dealt when considering the assets, could be a contentious issue.

What is a Prenuptial Agreement and are they legally binding in the UK?

A prenuptial agreement is a legal document signed by a couple before their marriage, outlining how assets, including business interests, should be treated if the marriage ends. In the UK, prenuptial agreements are not legally binding, but they are likely to be upheld by a court provided that the following criteria has been met:

  • Both parties have obtained independent legal advice and understand the full implications of the agreement.
  •  Both parties have had sufficient time to reflect on the terms of the agreement; it is recommended that parties sign a prenuptial agreement at least 21 days before their wedding day.
  • The agreement must have been freely entered into with no evidence of undue pressure or duress.
  • Both parties should have exchanged financial disclosure i.e. there should be full transparency as to what each party owns and the value of those assets. 
  • The agreement must meet both parties’ needs, if there are sufficient assets to do so, it is expected that both parties will be able to securely rehouse. There is likely to be some negotiation around what constitutes as ‘needs’ when agreeing the terms of the agreement.

How are business interests dealt with within a divorce?

It is important to be aware that without a prenuptial agreement, particularly in the case of a long marriage, the starting point is that all assets should be divided equally; this would include the value of any business interests. The purpose of a prenuptial agreement is to try and ‘ringfence’ an interest in a business and to stipulate that it is ‘separate property’, departing from the sharing principle.

Without a prenuptial agreement the court will expect parties to obtain an independent valuation of the business, this valuation will consider, among other things, whether there is any liquidity within the business with which to fund a financial settlement. In a lot of cases there is insufficient cash within a business to ‘buy out’ a spouse’s interest. In such circumstances, the court will have to consider:-

  1. Whether there are sufficient other ‘non-business’ assets such as properties, savings and investments that could be given to a spouse to ‘offset’ the need to divide the interest in the business.
  2. Can a settlement be funded over a longer period of time from the profits that the business can generate over that period of time. 
  3. If not, should the business be sold to release capital and fund a financial settlement? This is a last resort but is an option for the court if there are no other assets or options available.

Benefits of a Prenuptial Agreement for Family Business Owners

Clarity and Certainty

Prenuptial agreements bring clarity and certainty to the process of dividing assets. By outlining the terms in advance, they can eliminate the uncertainties and complexities that arise during a divorce. This foresight allows business owners to plan and make informed decisions about their personal and business future, without the shadow of unpredictability that often accompanies separation proceedings.

By clearly defining within a prenuptial agreement which assets are to be treated as ‘separate property’ and which assets are to treated as ‘joint property’ reduces the risk of a protracted and expensive dispute regarding division of the assets upon separation, this is also likely to reduce conflict.

Enhancing Trust and Transparency in Relationships

While often overlooked, prenuptial agreements can enhance trust and transparency in a marital relationship. They encourage open and honest discussions about finances and business operations, laying a foundation of trust and mutual understanding. This openness can strengthen the relationship, as both parties enter the marriage with clear expectations and an understanding of their financial future.

The process of entering into a prenuptial agreement 

Step 1: Initiate Open Communication

The process should begin with an open and honest conversation regarding the need for a prenuptial agreement. Discussing the reasons for the agreement, especially how it pertains to the family business, can help both parties understand its importance and the protection it offers.

Engaging legal professionals who specialise in prenuptial agreements and family business law is essential. Each party should have a legal advisor to ensure that their interests are independently represented and protected. These experts can guide the couple through the legal nuances and ensure the agreement is fair, comprehensive, and enforceable.

Step 3: Comprehensive Financial Disclosure

Both parties must provide sufficient financial disclosures, including all assets, debts, and income. This includes a detailed disclosure of the family business’s financial status, valuation, and structure. Accurate financial disclosure is fundamental to the fairness and enforceability of the agreement.

Step 4: Drafting the Agreement

A first draft of the agreement will be sent to the other party, who will be invited to obtain independent legal advice on the agreement if they have not done so already. It is normal for there to be negotiation on the terms of the agreement thereafter. It is important that the agreement addresses/includes:

  1. What is to happen in the event of a fundamental change of circumstances for either party such as illness, unemployment, or the birth of any children.
  2. Provision for the agreement to be reviewed upon a change of circumstances or over a period of time; usually at the 5- and 10-year mark. 
  3. How needs will be met upon divorce, those needs must be clearly defined and catered for within the agreement. 

Step 5: Finalising the Agreement

After review and negotiation, any necessary revisions should be made. Both parties should then re-review the agreement to ensure they fully understand and agree to the terms.

Talk to Us

If you're considering a prenuptial agreement to protect your family business, contact JMW for personalised advice and expert legal guidance. We're here to help you secure your business's future. Call us today on 0345 872 6666, or fill in our online enquiry form to request a call back.

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