Prenuptial agreement can help protect shares in a family business

Jan Flynn
Jan Flynn -

I’m working right now with a group of family-business owners exploring ways to assure success in the transition of the business to the next generation. One interesting issue we’ve looked at is the role of a prenuptial agreement.

In short, a prenuptial agreement is a legal contract that spells out who gets what in the event of divorce. As it relates to the family business, the prenup is one important document to help protect shares and assure business ownership stays in the family.

Current trends make consideration of a prenup important to any business owner with unmarried children who own shares or may inherit substantial shares of the business. By some statistics, more than 40 percent of all first marriages will end in divorce. And in today’s world, the average age of first-time brides and grooms — 28 for men and 26 for women — is increasing so it’s likely the heir may have shares prior to a first marriage.

And a prenup is not only for the children. Divorce rates for the boomer generation are on the rise. A startling one in four couples over 50 will have the marriage end in divorce. Put that together with the fact that 60 percent of second marriages end in divorce as do 75 percent of third marriages, and you see the value of a prenup for older business owners.

Here are some points to consider.

▪  State laws vary, but most share three basic principles. First, there must be full financial disclosure by both parties prior to finalizing any prenuptial agreement. Second, there must be no indication that the agreement was either hurried or coerced. This means conversations and agreements should happen long before any wedding takes place to assure that each person has time to fully consider and understand the contract. And each party to the agreement should have their own independent, completely impartial attorney to assure there is no conflict of interest.

▪  Be very clear about your goals. Your goal is to keep ownership of the company within the family, not to deprive the non-owner of any financial security should the marriage end. A good prenup will have sufficient assurances that their financial security will not be compromised by the agreement.

▪  Emotions must be considered. While the intent here is to protect the family business, you must consider how the request will be perceived by any party involved and tread lightly. This is not the time for a heavy-handed approach.

I want to be clear here that I’m not a lawyer and this is not legal advice. However, if you are a family business owner or heir to a family business, the question of how a prenup might serve your business’ future deserves consideration.

An experienced business executive and organizational consultant, Jan Flynn teaches at the J. Whitney Bunting College of Business at Georgia College & State University.