Pre-Nups for Business Owners: Protecting What You’ve Built
At Edwards Family Law, we are increasingly asked by entrepreneurs, founders, and family business owners how they can protect their business in the event that a marriage breaks down. For many business owners, their company is not just an asset on an asset schedule. It can represent years of risk, long hours, personal investment and, in some cases, the livelihoods of employees or family members.
This article looks at how the court treats business interests on divorce, what a pre-nuptial agreement can realistically achieve for a business owner, and the other practical steps available to protect a business from becoming a casualty of a relationship breakdown.
Why is this an issue?
Starting and growing a business has never been more common. More people than ever are setting up companies, whether as sole founders, with business partners, or as part of a family enterprise passed down through generations.
Unlike a house or a pension, a business is rarely simple to value, and it is even harder to divide. A family home can be sold and the proceeds split. A business, on the other hand, may rely entirely on the continued involvement of one spouse, may have other shareholders or business partners with their own interests, and may lose much of its value if it is broken up or sold under pressure.
Divorcing business owners are often surprised to learn that, in the absence of any agreement, a business built up before or during the marriage may be treated as a matrimonial asset, regardless of whose name it is in. This can place a business, and the livelihoods that depend on it, directly in the firing line of a financial settlement.
Is my business safe on divorce?
The starting point in England and Wales is fairness, and the court has very broad powers to achieve it. This means that shares in a company, a partnership interest, or even goodwill built up in a sole trader business, can all be taken into account when working out what each spouse should receive.
Matrimonial or non-matrimonial?
As with other assets, the court will consider whether a business is matrimonial or non-matrimonial property. A business started before the marriage, or one that was inherited or gifted, may initially be considered non-matrimonial. However, if it grew substantially during the marriage, particularly through the efforts of either spouse, the increase in value is likely to be treated as matrimonial, even if the underlying shareholding is not.
A business started together, during the marriage, using joint efforts or joint funds, is far more likely to be treated as a matrimonial asset in its entirety.
Valuation and liquidity
Even where a business interest is found to be matrimonial, that does not necessarily mean it will be sold or split down the middle. The court recognises that businesses are illiquid: there is rarely a ready buyer, and forcing a sale can destroy the value the parties are trying to divide.
Courts are usually reluctant to interfere with a trading business, particularly if it provides the family’s main income. Instead, the court often prefers to award the spouse who runs the business the business itself, offset by the other spouse receiving a greater share of other assets, such as the family home or savings. Where the other assets are insufficient to achieve this, a structured settlement involving deferred or staged payments out of the business’ profits may be ordered instead.
This is why early, specialist legal and forensic accountancy advice is so important: a business will usually need to be properly valued, often by a jointly instructed expert, before any sensible negotiation can take place. We have written a number of articles about how businesses are valued, and you can find these on our website if you would like to read more.
What can a pre-nup do for me?
A pre-nuptial agreement is, in our view, the single most effective tool available to a business owner who wants certainty about what will happen to their business if the marriage ends. Done well, it can:
- Record that the business (or a defined shareholding in it) is to be treated as non-matrimonial property, belonging solely to the business-owning spouse;
- Set out how any increase in the value of the business during the marriage will be treated, including whether the other spouse is entitled to share in it or not;
- Address how dividends, salary, or other income drawn from the business will be treated if it is used to support the family;
- Set out what is to happen if the other spouse works in, or contributes to, the business during the marriage;
- Protect co-founders, investors, or family members who also hold shares, by avoiding the business being drawn into a dispute it has no part in; and
- Reduce the likelihood of a forced sale, by agreeing in advance that the business-owning spouse will retain it, with the other spouse’s interests met from other resources.
This certainty is valuable not only to the business owner, but often to the wider business itself. In some cases, investors, lenders or co-shareholders may also want comfort that a founder’s divorce will not disrupt the business or affect their own interests. Some shareholder agreements can even require parties to enter into a prenup to protect the company shares, so it may be a requirement for a founder.
Drafting an effective pre-nup
While pre-nuptial agreements are not automatically binding in England and Wales, the court will usually give them decisive weight provided certain safeguards are met.
The essential ingredients
For a pre-nup to carry real weight, both parties should enter into it freely, without any undue pressure, ideally with the agreement signed in good time before the wedding (a minimum of 28 days is a sensible benchmark, though earlier is always better). Both parties should give full and frank financial disclosure, including, in the case of a business owner, a reasonably current valuation or at least an account of the company’s financial position. Each party should also receive independent legal advice from their own solicitor, and the resulting agreement must be broadly fair when it comes to be relied upon.
Drafting points specific to business owners
A pre-nup that is simply silent on a business, or refers to it only in passing, will be of limited use. We would usually recommend that an agreement:
- Clearly identifies the business or shareholding being protected, ideally with a current valuation attached as a schedule;
- Specifies the agreed treatment of any growth in value during the marriage, rather than leaving this to later argument;
- Sets out a sensible methodology for any future valuation, so the parties are not left arguing over which accountant, or which approach, should be used;
- Deals expressly with what happens if the other spouse becomes a director, employee, or shareholder during the marriage; and
- Includes a review clause, so the agreement is revisited periodically, particularly after the birth of children or a significant change in the business’ value.
- An agreement of this kind will not take the court out of the equation altogether, but it can make everyone’s position much clearer if the marriage later breaks down.
What a pre-nup cannot do
It is important to be realistic about the limits of a pre-nuptial agreement. The court retains an overriding discretion to depart from its terms were enforcing the agreement strictly would leave one spouse, or a child of the family, without their reasonable needs being met. Fairness is still the main consideration for the courts. A pre-nup that leaves a non-business-owning spouse with nothing, regardless of need, is at real risk of being overridden.
A pre-nup also cannot bind anyone who is not a party to it. Co-shareholders, business partners, or the company itself are not bound by an agreement between spouses, and separate protections, considered below, are usually needed to protect their position too.
Finally, a pre-nup cannot be used to avoid the duty of financial disclosure if proceedings are ever issued. Both parties will still need to be open about their financial position at the time, even where an agreement is in place.
Other ways to protect your business
A pre-nup works best as part of a wider package of protection, rather than in isolation.
Shareholders’ agreements and articles of association
Many businesses with more than one shareholder will already have, or should consider putting in place, a shareholders’ agreement containing pre-emption rights and compulsory transfer provisions. These can require a shareholder’s spouse, or a shareholder going through a divorce, to offer their shares for sale to the other shareholders before they can be transferred elsewhere, including under a court order. This is a safety net which protect the remaining shareholders, even where a pre-nup between spouses is not in place.
Keeping finances separate
Just as with a family gift, mingling business income too closely with the matrimonial finances can make it harder to argue that the business itself should be treated separately. Keeping dividends or director’s income in a separate account, rather than feeding them directly and exclusively into joint household expenditure, can help preserve the distinction between the business and the matrimonial pot.
Post-nuptial agreements
If you are already married and did not put a pre-nup in place beforehand, it is not too late. A post-nuptial agreement works in much the same way, and can be just as effective, provided the same safeguards around disclosure and independent advice are followed. As with pre-nups, timing matters: the earlier this is addressed, the easier the conversation tends to be.
At Edwards Family Law, we regularly work alongside corporate solicitors and accountants to ensure that a client’s pre-nup, shareholders’ agreement, and articles of association all work together, rather than leaving gaps that could later be exploited.
Frequently Asked Questions
No. The business itself may be treated as non-matrimonial at the outset, but any increase in its value during the marriage is likely to be treated as a matrimonial asset, particularly if either spouse contributed to its growth. The longer the marriage, the harder this distinction becomes to maintain.
It is unusual, and the court will generally try to avoid it, particularly for a trading business that supports the family finances. Wherever possible, the court prefers to keep the business with the spouse who runs it, and to meet the other spouse’s needs from other available resources, or through structured payments.
This is possible in theory, but rare in practice, particularly where there are other shareholders. The court will usually prefer to award a financial sum reflecting the value of the shareholding, rather than transferring shares directly, especially where a shareholders’ agreement restricts who can hold shares. The courts also often prefer a clear break, and will rarely order that both spouses should continue to hold a company together.
No, but courts will usually give a properly prepared pre-nup decisive weight, provided it was entered into freely, with full financial disclosure and independent legal advice for both parties, and remains broadly fair at the time it is relied upon.
Yes, and arguably even more so. A pre-nup protects your own position, but a shareholders’ agreement is also essential to protect co-investors from being affected by your divorce. Many investors will expect to see both in place, particularly ahead of a funding round.
This should be addressed expressly in any pre-nup. Without clear terms, a spouse who has worked in, or contributed significantly to, a business may have a stronger claim to share in its value, even if they hold no shares themselves.
No. A post-nuptial agreement can achieve much the same protection as a pre-nup, provided it is entered into with the same care around disclosure and independent advice. The sooner this is addressed, the better, as it becomes harder to negotiate once a marriage is under strain.
Yes, in certain circumstances. The court can depart from a pre-nup where following it strictly would leave a spouse, or a child of the family, without their reasonable needs being met. A well-drafted agreement will anticipate this and build in appropriate flexibility to reduce the risk of challenge.
Our experience
At Edwards Family Law, we regularly advise business owners, founders, and family enterprises on pre-nuptial and post-nuptial agreements, working closely with corporate solicitors and accountants where needed to ensure a business is properly protected from every angle. Please do not hesitate to get in touch should you have any questions arising from this article.