Family businesses can take decades of work and dedication to build but can potentially collapse during contentious divorces, devastating a family business and legacy.
Today, more than 50% of all marriages end in divorce. In the absence of a prenuptial agreement, the business interest may be considered a marital asset. So, if a shareholder in a family-owned business is involved in a divorce without a prenup, valuing and dividing the family’s assets and liabilities can be challenging, even under cooperative situations.
Fortunately, there are solutions to safeguarding your family business assets. In this article, we will discuss the importance of preplanning with a prenuptial agreement and ways you can protect your family business assets.
Preplanning
A prenuptial agreement, commonly referred to as a “prenup”, is a legally binding contract entered into by a couple prior to marriage. This agreement can help protect the family business by setting forth a plan to protect the family business assets and interests in the event of a divorce or separation. A prenup establishes the property and financial rights of who gets what for each spouse should the marriage end in divorce.
Preplanning with a prenuptial agreement to protect the family business is part of a good business strategy. Working with an experienced attorney and CPA can make the process less intimidating.
What Provisions Can Be Included in a Prenup to Protect a Family Business?
Keep Business Interests as Separate Property
By including specific provisions in a prenup, business owners can protect their business assets from becoming marital property. A prenup can clearly outline which property should be treated as a spouse’s separate property that is not subject to division and which should be treated as marital property in case of divorce. They can establish a business as separate property and outline the rights and responsibilities of each spouse regarding the business.
Richard Schloss, an attorney with Dawda Mann, PLC in Bloomfield Hills, says “I always recommend that the business interest remain separate from the marital assets and the spouse give up all rights to the business and the income it generates. It should be noted that the value of the business at the date of marriage is not the value that would be determinative of what a spouse would receive. It is based on the increase in the value of the business since the date of marriage.”
Business Ownership and Control
This clause can specify how ownership and control of the family business will be handled during a marriage and in the event of a divorce. A business-owner spouse can establish if the non-owner spouse can or cannot have any ownership rights or claim a share of its future growth. This can help avoid the disruption of business operations and ensure ownership and control remain intact.
Business Valuation
A business valuation clause can ensure fairness and accuracy to determine the valuation of the business at the time the prenup is made. In fact, in order to have an enforceable prenup both spouses need to disclose their assets and values. A business valuation expert determines the value of the business.
There are several methods for valuing a family business but they all focus on what is “fair market value.” This is what a “willing buyer” would pay a “willing seller” in a “free and open market.” The method to be used for each business is different. This clause can determine the value of the business interest and the amount the non-owner spouse might receive in the event of a divorce.
Business Debt Protection
With any business, the business owner may often accumulate considerable debt for continued growth and operations. In a divorce, debts obtained during the marriage are typically shared between the spouses.
However, without a prenup, a business owner’s personal liability for business debts could extend to their spouse. Many times, a spouse is required to guaranty the business debt. A prenup can protect both spouses by having a provision that clearly states which party is responsible for the business-related debt or an obligation to have the spouse released from the debt. This provision can shield the business owner from undue burden and prevent debt disputes during the divorce proceedings.
Confidentiality Clause
Consider adding a confidentiality clause to ensure the family business information stays in the family. Examples of business information that may be protected include business processes (methods, ideas, templates), marketing (sales processes, research and development), financial statements and reports, contacts (customers, vendors, subcontractors), and any other information generally not known to the public.
Spousal Support
A spousal support clause can specify how spousal support (alimony) will be handled if the marriage ends. The business-owner spouse can set limits or conditions related to the family business, ensuring it does not become a source of ongoing financial support.
Social Media Protection Clause
Another way to safeguard the family business is to add a social media protection clause to ensure the ex-spouse does not post harmful or damaging content online that can harm you or your family business’s reputation. For example, the clause can state, if violated, the offending spouse will owe the other spouse an agreed amount of $15,000.
Incorporating these provisions into a prenuptial agreement can safeguard the family business assets and reputation. Moreover, it ensures that even in the event of a divorce, the business will continue to thrive.
Ursula Scroggs, CPA, is managing director at DKSS CPAs + Advisors, with offices in Troy and St. Clair Shores, Michigan. Jean Stenger, CPA, is director of operations for DKSS.
