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PARTING ON GOOD TERMS

18th February 1999
Page 47
Page 47, 18th February 1999 — PARTING ON GOOD TERMS
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Which of the following most accurately describes the problem?

Many haulage companies are jointly owned by married couples—but the divorce rate has never been higher. If things go wrong and one partner wants to withdraw his or her half of the business, is it doomed? It might be a good idea to hope for the best—but prepare for the worst...

prenuptial agreements are no longer the sole preserve of celebrities and multi-millionaires. They are becoming a fashionable way to define both partners' financial— and other—obligations and rights. But their main role is to set out the financial arrangements in the event of separation or divorce.

These agreements are not legally binding in the UK, but a court is likely to pay serious attention to the terms of a prenuptial agreement when settling financial arrangements, provided the terms are reasonable and accepted by both parties. When deciding how to split the estate between the two parties the court might take into account the needs of the family business, but there is no mechanism to guarantee this protection.

An acrimonious divorce can damage a haulage business, or even wipe it out. The law seems firm on splitting assets 50:50 right down the middle, whether it involves the family home, or business, or both. In a bitter divorce that's how it has to be. But with a little goodwill on both sides a number of options are possible— and it could be in everyone's interest to preserve the business.

Many haulage businesses which are neither very profitable nor cash rich still have substantial underlying assets. In such cases the courts might well look at a capital settlement phased over a period of time.

When looking at such assets it is important to avoid prejudicing the firm's business plans. It is not unusual, when a business is expanding and developing, that it will periodically become cash rich, or appear to retain significant profits rather than paying them out as income. In these circumstances it would be important to be able to give evidence, preferably supported by business plans, that these funds are genuinely tied up.

Other problems can arise in a family business with more than one proprietor working within it. In this case something which might be otherwise reasonable as a divorce settlement might have a catastrophic effect. For example, there might be a capital investment requirement for all the proprietors to act in concert. The effect of one party withdrawing, say, £40,000 as part of a divorce settlement could become disastrous if all the proprietors did the same.

One option is to sell the business so that the proceeds can be divided fairly. Another is to agree with your spouse for part-payments over a period of time—or to keep the business intact and share future profits.

If the business is viable, practical solutions might include refinancing it to release funds; bringing in an investment partner to acquire the necessary funds; or merging with another business.

Jonathan Russell, partner at Critchleys, the Oxford-based chartered accountants, says: "Writing a partnership agreement for a husband and wife partnership makes a lot of sense. It's effectively a prenuptial agreement for the business. If a dispute arises, there is a mechanism for dealing with it It avoids a typi cal situation of matrimonial cases which end up in court because the two partners are entrenched in deadlock and the business suffers."

Provided the terms are reasonable and acceptable to both partners, then according to the latest edition of the UK 200 Group's Tax Planning' Guide there would be no need for prolonged and potentially costly negotiation.

Protecting your own business in the event of divorce is one thing. But what about protecting your own business from someone else's divorce? Where you have a business in which you have fellow partners or shareholders, a divorce settlement by one of those other parties could leave the business, and therefore you, in an awkward position.

Probably the least pleasant thing to remember when setting up a business with anyone is that the most important documents are those which you prepare in case everything goes wrong. These shareholder or partnership agreements should always include provisions covering catastrophes—including matrimonial break-ups.

Such agreements should include mechanisms for the valuation of the business, and this might well include "put and call" options between the various parties. This gives a regulated mechanism for valuation, and gives the various parties a chance to protect themselves.

• by Wilt Altman

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