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Helping your startup survive a divorce

Written by Adam Pescod on Tuesday, 07 October 2014. Posted in Legal

With divorce a fairly common occurrence among entrepreneurial folk, it’s always worth bracing your business for a marriage break-up

Helping your startup survive a divorce

Stats are few and far between for the number of entrepreneurs that have gone through a divorce. However, one can safely assume that next to your Average Joe citizen, the volume of entrepreneurs whose marriage ends up being terminated is proportionally higher. “Entrepreneurs don’t have a very healthy balance between work and home life,” says Dr Stephen Bence, divorce finance expert at Vardags, the law firm. “The classic entrepreneur works extraordinarily hard and often does that in quite anti-social ways, whether that’s late at night, over weekends or travelling to get a deal done. It’s a high hours, high stress culture and relatively few manage to balance that against the demands of family life.”

Whilst divorce can be an emotionally and financially crippling experience for many people, it’s worth considering the additional implications of a marriage break-up for an entrepreneur. “Divorce can end up being effectively a tax of 50% or more on your entire wealth. That’s the biggest tax bill – in inverted commas – that you’ll ever pay,” says Bence. “And it can be particularly problematic for entrepreneurs because a high proportion of the wealth of the marriage will be tied up in the business and that is often an illiquid asset. In extremis, the business could end up having to be sold in order to fund a divorce settlement.”

Given what’s at stake should divorce papers land on an entrepreneur’s desk, being able to protect one’s assets is imperative. Thankfully, there are a number of avenues available to a business owner. “There are lots of mitigation tactics that one can deploy,” explains Bence. “The first and most obvious is to get a prenup. That takes it out of the courts as much as possible and determines what’s going to happen to the assets in the unfortunate event of a marriage breakdown.”

Removing the rose-tinted glasses can also pay dividends for an entrepreneur in times of divorce. Bence explains that getting a more realistic value for one’s business can sometimes go a long way in helping to limit the damage. “One has to give the entrepreneur a dose of realism when it comes to a divorce,” he says. “Just because you’ve attracted investment that notionally values a business at one value doesn’t necessarily mean that’s the value that you could really get for your shares were you to sell them.”

“Once you’ve got them into that frame of mind, it’s about looking at why that business might be worth less than it might on first glance appear,” Bence continues. The position of the entrepreneur in the company can have a large bearing here, along with the actual amount of control they have within the business. “You have got to look at the real control of the individual and the class of shares that they have got to determine what the real value is,” he adds. The level of liquidity in the business may also be taken into consideration, which again could see the actual value of the business end up being lower than envisaged by the entrepreneur. “That can make a huge difference to the outcome of a case,” Bence says.

In the absence of a prenup, there are still ways that matters can be kept out of court, thus limiting the time, stress and expense involved in such proceedings. According to Bence, the options available to an entrepreneur include raising money against a business instead of selling it; reaching a settlement whereby a pay-out can be made over a number of years; or even offering one’s spouse an ongoing share in the business. “The courts tend to be quite limited in the options whereas, by negotiation, you can come up with much more creative solutions,” he says.

It goes without saying that transparency is everything in divorce proceedings. Having worked alongside the high-profile Young vs Young case – in which property tycoon Scot Young was jailed for non-disclosure of key assets – Bence knows first-hand what entrepreneurs risk by keeping secrets. “As an entrepreneur, if you’re involved in divorce proceedings, you really should get professional advice pretty damn quickly,” he says. “If you head off in the wrong direction and you’ve got somebody on the other side who is absolutely determined to hunt you down, it can be incredibly time-consuming, incredibly expensive and ultimately you can get caught out.” He continues: “One should be quite proactive about financial disclosure: be upfront about it, present your finance in a realistic – as opposed to optimistic – way and let that be challenged by the other side.”

Of course, there is another option for entrepreneurs when divorce comes a-knockin’, one which, according to Bence, is favoured by many. “I’ve seen a number of incredibly successful entrepreneurs take the attitude of ‘I’m just going to give them half of it. I then want to move on with my life and just go and earn it again’,” he says. “It’s another alternative: rather than fight it, just go with it and then make yourself successful again. It saves the time and aggro of going through a costly and acrimonious divorce, something which can be incredibly distracting when you’re trying to make money.”

In an ideal world, an entrepreneur will balance their professional and personal lives without causing too much damage to either. However, this is easier said than done so assessing the options at the earliest stage possible is the wisest approach. “Everybody should be going into marriage thinking about the possibility that it doesn’t work out,” concludes Bence. “Entrepreneurs are even more prone to that and so they, like everybody else, really should be thinking about it right from the start.”

About the Author

Adam Pescod

Adam Pescod

EB's former editor, Pescod was tasked with ensuring these hallowed pages are rich with excellent, engaging and error-free stories, all written with the entrepreneur in mind. Pescod previously plied his trade penning pieces about pubs and pints. He is also a sucker for alliteration. 

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