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Taxing Times

Don’t Lose Your Business Just Because You’ve Lost Your Marriage Divorce can end up being a 50% “tax” on your entire wealth. That’s far, far worse than the tax rate you’ll pay when you eventually sell your company for billions. And it can be particularly problematic for us as entrepreneurs when a high proportion of our wealth is tied up in an illiquid private company.

W

e spoke to Dr Stephen Bence, Founder and Chairman of fast-growing business information company Beauhurst and Director of Strategy and divorce finance expert at top family law firm, Vardags to find out more.

valuation of shares in a business by 90% or more. There is almost always something that can be done. Judges tend to be quite unimaginative in what they will ultimately order as a settlement if your case is determined by the Court (not to mention the enormous cost of going through a fully-contested divorce process). Much better to try to negotiate a settlement. Perhaps you can find a way in which your spouse can retain a stake in the business and be aligned with your interests (both upside and downside); perhaps you could structure a payout over several years; perhaps you could raise money within the business; perhaps you can set up trusts to protect the long-term value for your children. By far the best settlements I’ve seen have been negotiated, creatively and early-on in the process before the parties establish entrenched positions.

Sadly divorce affects many of us, perhaps because of the difficulties balancing the extraordinary demands of growing a business with those of maintaining a thriving family relationship. The press has recently been awash with stories of business owners paying millions to their ex. Thankfully, a number of avenues are available to an entrepreneur to mitigate the financial effects of divorce. 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. If you’re already married you can get a postnup, and create a clear and plan in the best of times, to prepare yourself for the worst of times. Since Vardags’ success in 2010 in the Supreme Court in the “Radmacher” case, pre- and post- nups are generally upheld.

When your life’s work is at stake, the temptation to try and hide your wealth from the courts can be intense. The most common tactics business owners use are: hiding it offshore and/or in trusts, putting shareholdings into the name of relatives, friends or business associates, creating dubious debts (to parents, to the company, to friends), “hiding behind” the corporate veil and creating a web of companies. Recently I’ve recently witnessed more obscure attempts to hide wealth, for example by investing in hard-to-track Bitcoins.

The second thing is to look at what you brought into the marriage because that is typically excluded from the 50/50 division. Perhaps your company was still a start-up at that stage, but it may have had considerable latent value that should be taken into account.

In consequence, divorce law has become a highly sophisticated corporate and financial discipline as lawyers and experts try to crack their way through to the truth – in a complex game of hide and seek. There is no doubt that some people “get away with it”, but many others certainly don’t and the Courts can take a pretty dim view of people trying to deny their spouse access to their wealth. It’s a game of poker and we would never advise a client to play it.

“My company’s going to be worth a billion in a few years”. Great for investors and staff, and great for inspiring oneself through the inevitable tough times building a business. But a disaster during a divorce! You need to remove the rose-tinted glasses and ask a few key questions: What would someone really pay to buy shares owned by you, the key person in the business? Generally far less than an investor would pay to purchase new shares to help grow your business.

As an entrepreneur or business owner, if you’re involved in divorce proceedings, you really should get early professional advice. The worst cases I’ve worked on have been picking up the pieces of a DIY-job. 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, horribly expensive and ultimately you may well get caught out. One should be quite proactive about financial disclosure: be upfront about it, present your wealth in a realistic – as opposed to optimistic – way and let that be challenged by the other side.

What rights do investors have over your business that restrict the value of your shares? Often quite a few: preference shares, consents or vetos, drag-along provisions, etc. If the business were sold and a “professional manager” put in place to manage the business what would that do to the profits and hence the value? Certainly there would be the direct extra costs of that individual and perhaps some indirect ones too.

Of course, there is another option for people when faced with divorce. 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’. It’s an alternative: rather than fight it, just go with it and then make yourself successful again. It saves the time and misery of going through a costly and acrimonious divorce, something which can be incredibly distracting when you’re trying to make money.

What risks are there? Past performance is not necessarily a guide to the future. Asking such questions and getting a realistic value for one’s business can sometimes go a long way to mitigate the effects of divorce. I’ve been involved in cases where using arguments such as the above have reduced the “headline”

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Wealth & Finance June 2015  
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