What would happen to your family business if you and your spouse split for good? To prevent problems later, divorce attorneys and family-business specialists advise married business partners to clearly lay out the terms of their partnership -- in writing. A must-have: a buy-sell agreement. Yet 48% of family-owned businesses said they didn't have one, according to a 1997 study by Arthur Andersen.
Reporter Molly Gordy, who has chronicled the devastating effects divorce can have on a small business for BusinessWeek's Small Biz supplement, spoke with family-law attorney Jeffrey W. Brend, a partner in Levin & Brend in Chicago. He's also a certified public accountant, business valuator, and chairman of the Chicago Bar Assn.'s matrimonial law committee. Edited excerpts of their conversation follow:
Q: What does a buy-sell agreement do?
A: It's a legal document that defines each partner's rights and responsibilities in the business and lays out how to divide assets and liabilities in case the partnership dissolves.
Q: Do you think it's important for married business partners to have one?
A: I'd go one step further, and advise them to sign a post-nuptial agreement that defines everybody's rights and responsibilities if the marriage breaks down, and how to divide the business at the same time. It's very similar to a buy-sell agreement, but it empowers a divorce court to deal with your assets, so the two issues are consolidated under one judge. That saves a lot of legal fees.
Q: What's the best way to set up a post-nup?
A: Hire a corporate attorney to define the normal buy-sell terms of that agreement: What happens upon death, retirement, and if one party wants to sell their interest. It should include a right of first refusal. That means a partner who wants to divest can find a third-party buyer at fair-market value, but the remaining partner must be offered those shares first at the same price. The post-nuptial portion of the agreement should be handled by a family attorney. It should address potential issues such as what happens if one partner stops working to have or care for a child.
Q: How should ownership be divided?
A: That's a sticky issue. If shares are divided 50-50, it can cause deadlock on major business decisions. But minority-interest shareholders need to be extremely wary, because they have little protection under the laws of most states. They need to make sure they have what are commonly called "piggyback rights," so that all shares going outside the company are sold proportionate to the current ownership. If the split is 60-40, for example, the majority shareholder could not sell 60% of the company to an outsider, leaving the minority owner stuck with a new partner not of their choosing. Instead, an outsider who wanted to buy 60% share of the company would have to buy 40% of that chunk from the minority shareholder.
Q: If one partner buys out the other, how should they decide fair-market value?
A: The ideal is jointly hiring an independent business valuator. If they can't agree on one, they could hire separate valuators and submit the differing evaluations to binding arbitration. An important aspect to consider is the payment plan. The remaining partner should be given a timetable for buying out the departing partner. Often, ready, immediate cash is not available, but could be paid out over 5 to 10 years, per the parties' agreement.
Q: How do you find a qualified business valuator?
A: Look for an accountant who has received specific training in business valuation from one of three highly regarded societies: the American Institute of Certified Public Accountants, Institute of Business Appraisers, and the American Society of Appraisers. Consider their years of experience, and whether they are familiar with the industry you operate in.
Q: What does the valuation report include?
A: It looks at assets, liabilities, past income, and future income under the new structure that would occur after the sale. People buy a business based on future cash flow. They want to know how it might change under new management.
Q: This seems like sensible advice. Why don't more couples follow it?
A: The emotional aspects of a pre- or post-nuptial agreement are as intense or more so than many divorce cases. You are assigning failure to what you hope will be the most successful enterprise of your life: your marriage. And nobody wants to think about that, especially when they're starting something new.