No one enters a relationship—be it personal or business—thinking it will fail. But what happens when it does? Recently, the world looked on as Bill and Melinda Gates announced they are divorcing after 27 years of marriage.
"High-profile cases like this should cause many people to take a look at how their business and marital assets are tied together," said Mike Benedict, business transition advisor at BOK Financial®. "While it may not be a comfortable topic to bring up, it's imperative to have plans in place from the beginning. No one thinks their partnership will end, but it's necessary to have a plan in place, just in case."
There are three typical outcomes when married couples working as business partners decide to end their relationship:
- One person buys out the other partner's shares and continues running the business.
- The partners sell the business and split the proceeds.
- The couple continues working as partners after the divorce (this is the route the Gates' are reportedly taking).
Experts say safeguards can be put in place on day one of the relationship to protect your personal and business assets in the event of a divorce.
One way to do this is through a prenuptial agreement. "These agreements set the guidelines for what will happen if a split occurs and, because they're drafted early on, they're able to focus on facts, not emotions.
Interest in prenuptial agreements is picking up. In a 2019 study by the American Academy of Matrimonial Lawyers, 62% of attorneys reported an increase in the number of clients requesting prenuptial agreements.
Prenuptial agreements can offer clarity on the marital/business relationship, experts agree. The agreement should:
- Establish the value of the business as of the date of marriage or the date the agreement is signed.
- Outline a course of action with the appreciation or depreciation of the business from the date of the marriage.
- Clarify how business value will be measured.
- Outline the allocation of business to be awarded to each spouse in the event of a divorce.
Benedict said along with the prenuptial agreement any privately held company should have a shareholder agreement (or "operating agreement" for non-corporations).
"The shareholder agreement is one of the single most important documents that the owners of a closely held business will ever sign," said Benedict. "This agreement controls the transfer of ownership when certain events occur, like divorce."
This agreement outlines which party will buy out the other's shares of the company if a buyout is to occur, or if either party has the right to sell, how ownership interest will be valued, and what the terms and conditions are around acquisition.
"Because there are some tax implications involved in a buyout, it's best to bring an expert on board for this process," he said.
In addition, Benedict said, life events like divorce or changes in a business partnership are an appropriate time to update your will, estate plans and any necessary insurance policies.
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