I'm happily married and the owner of a thriving company. My spouse doesn't work in the business. We signed a prenup years ago. In the unlikely event that we split, I don't need to do anything else, do I?
If you and your spouse have adhered to all the provisions in your prenuptial agreement, you're probably fine. That means sticking precisely to the agreements, including those that specify whether you should separate or commingle bank accounts and other financial matters. Otherwise, a judge could declare certain provisions of your prenup null and void and work out an entirely different asset split.
There are further precautions you can take, however. For one thing, do everything you can to segregate all corporate-related assets (such as stock ownership) and liabilities (such as bank loans to support the company) in the name of the spouse who is actively involved in running the business. Ideally, the family's joint financial assets, such as the ownership of a home, a car, or an investment portfolio, will be distinct from those relating in any way to the business.
We know, we know. The business undoubtedly constitutes the bulk of your family's assets. But it will be simpler to adhere to the blueprint spelled out in a prenuptial agreement if corporate assets are kept separate from the family's personal assets. To be on the safe side, ask a lawyer to evaluate your prenuptial agreement and recommend changes or updates. Then talk to your accountants (both personal and business) about how to best go about separating the assets.
It never occurred to me to sign a prenuptial agreement. But since my spouse is actively involved in running the company, can't we just assume that we'll both have its best interests at heart if our marriage should fall apart?
You should take the same precautions when your spouse is a business partner that you would with any other business partnership. The strategy of choice is a buy-sell agreement. A good buy-sell agreement doesn't need to be long, but it does need to cover some essential issues. Our recommendations: Both spouses should agree to several restrictions concerning the ownership of their company's stock. It must be held only by people who are actively involved in the business. If either spouse leaves the business, his or her stock must be sold back to the partner who remains active. Neither spouse can sell shares to anyone else without the other person's permission. And finally, in the event of a divorce, one spouse must leave the business and agree to sell his or her stock back to the active owner. And if you want to be extra safe, include a clause to cover a situation in which you and your mate separate but do not actually wind up in divorce court.
Next--just as with a prenuptial agreement--you need to plan for an orderly and fair transfer of the company's stock, should that become necessary. Like a prenup, a buy-sell agreement should specify how the stock will be valued.
Michael and Cathy Brown, who are co-owners of Boston-based accounting firm Brown & Brown, designed the valuation technique in their buy-sell agreement themselves. "We've got a 'push-pull' clause, which says that in the event of a divorce or either of us leaving the business, we'll flip a coin to determine who will set the stock price," explains Michael. "If she sets it, I get to decide if I want to buy or sell." He adds, "This kind of an arrangement keeps everyone honest, because if she were to jack it up too high, she might wind up having to buy me out at that price, rather than getting to sell it at that." A push-pull agreement might not suit you, but you and your spouse will still want to work out some type of strategy for deciding who stays with the business in the event of a divorce. Also include the requirement for an extended payout period, as long as five years or so, to avoid cash strains on the remaining spouse or the business. Usually, couples who go the buy-sell route opt to sign an additional employment document as well, which includes some type of noncompete safeguard.
I haven't done any divorce planning, but my spouse isn't involved in my company. Isn't that enough of a protection?
If you can come up with the cash to handle the 50-50 split in a community-property state, or if you live in an equitable-distribution state and can afford to fork over a minimum of 25% of your company's value, maybe you want to leave well enough alone. Because, frankly, if there's one thing more emotionally laden than a prenuptial agreement, it's a postnuptial agreement that covers the same ground (a projected split of assets, a method for valuing the company's stock, and a prolonged payment schedule). The only difference is that a postnuptial document gets signed after--sometimes long after--the honeymoon is over.
One suggestion is to set up the postnup to focus only on the company's stock, with all other marital assets to be divided according to a judge's decision. Or you might also agree to segment personal assets that are important to your spouse, perhaps because they represent his or her accumulated earnings, a personal inheritance, or even a favorite piece of property.
If it seems absolutely impossible for you and your mate to agree on how corporate and marital assets should be split, maybe it pays to leave that one issue up to the judge, should you ever wind up in divorce court. But you'll still help protect the long-term survival of your company if you can at least agree on such matters as how the business will be valued and how long the payout will be extended.
If the notion of any kind of postnuptial is too much to contemplate, you may do better with a variant on the buy-sell theme. Your goal should be to structure an agreement that requires all shares of stock owned by a nonactive spouse (or awarded to that spouse by the judge) to be bought back by the active ex or the company. Again, the buy-sell should also specify the valuation method and payout scheme to be relied on.
