To avoid a similar downside result, take the same precautions recommended earlier on all estate-planning gifts that could affect your company's future. That might mean housing those gifts within an estate-planning trust or requiring recipients to sign a legal document, along the lines of a buy-sell agreement, that would require them to transfer the gift back to you as the company owner if they get a divorce. (As always, specify how the transfer will be valued and paid for.)
Are family divorces the only ones I need to worry about? And if not, what precautions do I need to take?
It's difficult to come up with a complete scoreboard of all the marital breakups that could conceivably make your life as an entrepreneur miserable. But here's a short list: Your business partners'. Your investors'. Your key employees' (if you've given them stock or even warrants).
"Anyone who has seen the havoc that a hostile minority shareholder can cause would never again hesitate to take some precautionary measures," says Michael Brown. "We often are hired to perform a forensic accounting evaluation of all the ways that an owner is taking money out of the business. It can get as elaborate as examining every American Express bill, every car-lease arrangement and other ownership perk." The rationale behind that type of foraging is simple: your minority shareholder is worried about a situation in which you're taking too much money out of the company through various perquisites rather than concentrating on building the company's value and thus the shareholder's investment. "You just don't want to leave yourself open to that by failing to restrict stock that passes out of your hands," Brown advises.
Lawyer Landau recommends considering an agreement--whether between business partners, a company and its equity investors, or others with stock or option holdings--that says in the event of a divorce, stock automatically becomes nonvoting and must be offered for sale to the company at a specified price or valuation formula.
If you don't have a divorce-proof shareholders' agreement in place, make it a high priority to negotiate one that will bind everyone who's holding your stock. You'll all need to sign it. But it may be easier to persuade your minority partners to sign it than you expect. After all, they'll be better protected, too, since such an agreement will safeguard their own holdings as well as the company's future if you're the one to wind up in divorce court and a judge tries to give away 50% of your shares.
Jill Andresky Fraser is Inc.'s finance editor.
Checklist for Couples in Business Together
Make two copies of the checklist. Answer the questions individually, checking yes or no as appropriate. If your answer is not clear-cut, mark no. Evaluate your responses by comparing your answers with those of your partner. If you both answered yes to a particular question, applaud your sound management. If you both answered no, you've uncovered an issue of concern.
STRATEGIC AND SHARED DECISION MAKING
1. Do you each have sufficient voice in major decisions?
__ YES __ NO
2. Is it obvious, to you and to employees, who decides what in your business?
__ YES __ NO
3. Have you established mechanisms to settle business disputes between the two of you?
__ YES __ NO
4. Can you hear negative feedback from your partner without having it hurt your relationship?
__ YES __ NO
BALANCE
5. Does working with your partner enhance your relationship?
__ YES __ NO
6. Are you satisfied with the way you, individually and as a couple, spend your time?
__ YES __ NO
7. Do you receive sufficient appreciation from your partner?
__ YES __ NO
8. Are you as passionate about each other as you are about the business?
__ YES __ NO
PLANNING AND CONTROL
9. Do you have sufficient voice in making financial decisions?
__ YES __ NO
10. Are you attractively compensated for your involvement in the company?
__ YES __ NO
11. Do key advisers (certified public accountant, lawyer, banker, insurance agent) relate with each of you in a manner appropriate to your individual responsibilities within the business?
__ YES __ NO
12. Do you have formal legal agreements covering the form of business and ownership?
__ YES __ NO
Excerpted with permission from the checklist accompanying the Couples in Business Together Video, Austin Family Business Program, Oregon State University, 800-859-7609, www.familybusiness.orst.edu.
