Thursday, January 29, 2009

Business Prenup

I wrote about business prenups in More prenuptials for businesses and now I have found another writer on the same subject with Got a Business?Get a Prenup:

Business owners look forward to "prenups"--whether with a spouse or a business partner--with about as much eagerness as a rectal exam. Sure, it's necessary, but it's often unpleasant and something you'd rather skip. Some people do-- avoiding the doctor for that reason.

But those exams can uncover serious health situations that, if left untreated, could wreak terrible damage. Same goes for not having a prenuptial agreement. If there's a divorce and you haven't worked out how to handle your assets, the damage inflicted on your company could be devastating.
The article nails the difficulty of getting business owners to think about break ups and then goes into all the good points favoring putting a buy-out agreement into the corporate by-laws or limited liability company's operating agreement.
Contested divorces rarely bring out the best in people. Some will be ruthless, just to spite the soon-to-be ex-spouse. It's not unheard of for a spouse to fraudulently claim that he or she has a stake in the other spouse's business, which could be hard to disprove if you've not kept appropriate records. A prenup offers protection against predatory challenges in the following ways:

It can define your company as an asset acquired before marriage.

It can provide for who controls the company post-divorce.

It identifies who owns the stock in the company.

It can set out a fair method for valuing the business or its stock at the time of divorce (which could refer back to the formula contained in the company's ownership agreement).

It can address all present and future property, assets and income, both during the marriage and in the event of divorce.
Like an ideal relationship, a successful prenup has the following qualities:

It's fair.

There's full disclosure of financial (and other) issues.

The parties entered into it freely (e.g., you're not forcing your intended to sign while you're on your way down the aisle).

If you are operating a business with someone besides yourself but do not have a buy-out agreement, you need to ask yourself why you are in this position. Then you need to get this potentially expensive problem fixed.