Pre-Nup Agreements as Part of Family governance

Pre-Nupital Agreements & Family Businesses

Divorce is Disruptive…

While widely quoted statistics tell us that 40-50% of first-time marriages end in divorce, the divorce rates have been dropping for college-educated couples since the 1970’s. While waiting longer to marry, co-habitating first and sometimes breaking up without marrying affect the overall statistics, living happily ever after is not a given. Divorce still happens about one-third of the time according to Claire Cain Miller in a New York Times article.

Divorce can be very disruptive to the family-0wned business as the very nature of a family business means that multiple generations and spouses work together. Child-custody issues, increased sibling rivalry, time out for negotiations, meetings with attorneys, personal issues preceding business issues, judgement clouded by concern over a failing marriage, legal costs and other factors can weigh heavily on a family-business enterprise.

If family assets are either jointly owned or considered marital property, this can add pressure to business concerns. Valuations are expensive and time-consuming. Suddenly, a privately held business is being scrutinized by outsiders. Most divorce attorneys will also tell you that a privately held business is one of the most challenging assets to value. Access to capital can be restricted if turmoil among spouses is evident or a joint owner refuses to agree to loan covenants.

Governance matters…

While parents cannot prevent their children from marrying their chosen partner, they can help mitigate the potential disruption from divorce with governance. As part of the family’s overall governance, pre-nuptials can be required for any family members or next generation who may have equity ownership or voting ability in the family enterprise.

While couples enter into marriage with optimism and hopes of eternal bliss, the reality is that a large percentage of marriages fail and the fallout can be detrimental to a family business as well as interest in other non-operating assets such as rental real estate. Couples entering into marriage are often very uncomfortable breeching the idea of a pre-nuptial agreement, especially, if the net-worth of the couple are quite disparate.

By having a pre-nup mandated by the family governance rules, it can take the pressure off the moneyed spouse to bring up the issue. Protecting the interest in the family-owned business is at the core of all governance. The goal is not to be unfair to the spouse but to set parameters for ownership, shares, voting and other critical issues which affect the ability of the business to not only prosper but to continue to conduct business as normal.

Implementing family governance is best done with the assistance of an outside advisor. There are specialists who work in this area who have a lot of experience with outcomes both good and bad. They can help the family implement effectively for future generations to help preserve the family assets. Often, this advisor can be used to introduce the governance measures to the family members and even help explain the terms to the intended betrothed. This can help alleviate some of the potential discomfort and be sure the issue is addressed in plenty of time before any engagement is announced and wedding plans get underway.

Execution matters…

We typically advise the younger generations in the family owned businesses with whom we work, to be sure any pre-nup is discussed and executed well in advance of wedding plans being made. We suggest terms not be a surprise to the incoming partner and recognize that this is a family issue.

Another technique which can help smooth out the potential for a poor reception from the non-moneyed spouse is to have a Trust & Estate attorney advise and execute the pre-nuptial agreement rather than a divorce attorney. Choosing an attorney wisely is critical as execution and timing is critical. A trust & estate attorney can also take estate planning into consideration in advising on the terms of the pre-nuptial agreement.

Both parties need representation and the earlier the better. More than one pre-nup has been contested in an all-too-often public battle by not executing properly.

Governance matters and along with items such as voting age, equity interest for  family members who are not active in the business, education mandates and more pre-nuptial agreements should be part of smart family governance.