Is a postnuptial agreement part of your family business succession plan?

The 2020s have been called ‘The Great Wealth Transfer,’ as £1 trillion of wealth built up by the ‘baby boomers’ is expected to pass to the next generation. Much of this wealth will pass via a family business, and parents who wish to retire are having to make strategic decisions about succession planning.

A particular concern for many is the potential impact on a family business of a divorce or the dissolution of a civil partnership, and the consequent negotiations of a financial settlement.

‘Business difficulties can arise for any number of reasons, and directors usually have business strategies, budgets and contingency plans,’ says Samantha Sinclair, Head of Family with Ware & Kay incorporating Pearsons & Ward Solicitors in York, Wetherby & Malton. ‘However, few businesses have a plan for what would happen if an owner got divorced. This could have devastating consequences for a family business, yet it is rarely talked about until it is too late.’

According to the Office of National statistics, 41 per cent of marriages will have ended in divorce prior to their twenty-fifth anniversary. With such a high level of risk, it is not surprising that business owners are asking what can be done to protect their business in such an event – especially if they perceive a child to be in an unhappy marriage.

If the founder’s offspring is already married or in a civil partnership, then one thing to consider would be to propose a postnuptial agreement before they transfer business assets.

What is a postnuptial agreement?

A postnuptial agreement is a legal contract between spouses, outlining how assets will be divided in the event of divorce, which is signed after the marriage or civil partnership has taken place.

Like a prenuptial agreement, a postnuptial agreement cannot oust the court’s authority to make an order in financial remedy proceedings following a marriage breakdown. However, a court will usually give effect to a postnuptial agreement if it is freely entered into, both parties understand fully the implications and it is considered fair to hold the parties to the terms.

How will a postnuptial agreement benefit the family business?

When negotiating the financial settlement in a divorce, business assets will normally be valued as part of the wider matrimonial assets. A postnuptial agreement is unlikely to be able to ring fence the business entirely, but it can be realistic about how much of the asset a spouse or civil partner could expect and over what time period payments would be made. For example, it could stipulate that a spouse would receive a certain percentage of turnover or profit, and allow for this to be paid over a number of years to minimise disruption to trade.

If the couple worked in the business together, then a divorce could also mean negotiating the end of one spouse’s or civil partner’s employment as well. A postnuptial agreement can include the basis for how any severance would be calculated, and stipulate any restrictive covenants such as not setting up business or working for a competitor within a certain trading distance of the existing business. You may have further stipulations you wish to include that are specific to your business, such as protecting your trade secrets and customer and supplier lists or ensuring your employees are not poached.

Reassurance can be provided between family members if all owners are prepared to enter a postnuptial agreement. This means each of your livelihoods can be protected. It can encourage both investment into the business and growth as it helps to provide stability and certainty.

What can a postnuptial agreement cover?

While the postnuptial agreement may have been prompted by the proposed transfer of business assets, the agreement can cover how all your assets would be divided, not just the business assets. For example, you can agree what happens to land, properties owned, stocks and shares, saving and investments, as well as pensions.

One of the advantages of a postnuptial agreement is that while it offers you more certainty, it can also save you significant costs if a divorce does occur.

The importance of independent legal advice

It is critically important for each party to have independent legal advice. For any agreement to be enforceable, the court needs to be satisfied that it was entered fairly, with each person having a full appreciation of the assets involved and what their entitlements could be in a divorce. If upon receiving advice your spouse or civil partner does not wish to enter the agreement, then they have the right to refuse. If the court feels that someone has been unduly influenced to sign, then it is unlikely to uphold the agreement.

If your spouse or civil partner does not have the resources to pay for legal advice, then you can offer to pay or the business can pay, but the legal advisor acting must be clear that their client is your spouse or civil partner, and not you. Their duty lies with their client.

How we can help

If you are the parent who wishes to propose a postnuptial agreement to protect the future of your business, we can help you by providing you with the basis and information needed for your child to consider, including the protection it provides when growing your business.

If your parents or your in-laws have proposed a postnuptial agreement as part of their business transfer, then we can help you to understand the proposal and what would be fair to you in the circumstances. We will advise you on what your likely entitlements would be in a divorce scenario.

Contact Samantha Sinclair, Head of Family on York 01904 716000, Wetherby 01937 583210 or Malton 01653 692247 or email samantha.sinclair@warekay.co.uk.