If you own or are part of a family business (or any business for that matter), you may wonder how a prenup can help protect it. Maybe it’s your mom pushing you to do this, or maybe it’s you, but either way, getting a prenup can be a great way to ensure all of the business assets STAY in the family. Let’s jump into why prenups matter for business owners, how to value them, and what you can include in your prenup to protect your business.
Why Prenups Matter for Family Business Owners
Family businesses often have unique dynamics and complex ownership structures, which can make divorce proceedings particularly complicated. Without a prenup in place, a divorce can have significant implications for the business and the income and assets involved.
A prenup can help protect the business by setting forth a plan for how it will be treated in the event of a divorce. For example, a prenup can address the valuation of the business at the time the prenup is made, how much the spouse owns in the said business, and what should come of various business interests (including appreciation). Not only that, but prenups can put in place non-compete clauses with the other spouse, confidentiality clauses, and social media image protection. These provisions can help ensure that the business remains intact and continues to thrive, even if the owners’ marriage dissolves.
What Can You Include In Your Prenup To Protect A Family Business?
Okay, so you understand why they matter, but what are the tangible ways you can protect your business with a prenup? Let’s dive in.
Keep (Present or Future) Business Interests Separate Property
Whether you already have a business or you plan to start one in the future, you can include it in your prenup! In other words, you can include your present and/or future business interests separate via your prenup. This includes any investments put into the business, as well.
Appreciation in Value of Business
What about if your business increases in value from the time you signed the prenup to the time of the divorce? How should that appreciation be handled? Keep separate or share it in a divorce? For example, let’s say your business is valued at $1,000,000 at the time of signing the prenup, and you have 100% ownership. At the time of the divorce, it was valued at $5,000,000. What should happen to the appreciation of $4,000,000? You can decide what to do with this in your prenup!
Income Protection
A prenup can also protect the income generated by the business and ensure that it remains separate property. This can be important for family businesses where the income generated by the business is the primary source of income for one of the spouses and/or other family members.
For example, the prenup may specify that any and all income that Spouse A receives will be considered separate property and not subject to division in the event of a divorce. Alternatively, if the spouses decide not to keep income separate, the prenup may outline a plan for how income will be divided between the spouses in the event of a divorce (50/50, based on contribution, etc.).
Business Debt
With any business, there may be a level of debt that exists. Businesses need money to flourish, and sometimes that means taking out business loans. Whether you’re the borrower or not, you and your partner should discuss what will happen to the business debt taken out (before the marriage and during the marriage). Here are some questions you should be discussing:
- Should we make any business debt taken out prior to the marriage separate (i.e., only the person who borrowed it is responsible for it in the event of a divorce)?
- Should we make any business debt taken out DURING the marriage separate (i.e., only the person who borrowed it is responsible for it in the event of a divorce)?
Protecting Confidential Business Information
Another way to protect your family business is to make sure any business information STAYS in the family. This can be done by including a confidentiality clause in your prenup. Depending on what your clause says, the type of business information you may protect could include:
- Business methods, ideas, reports, summaries, documents, databases, and templates;
- General information regarding the business (financial statements, marketing, sales, research and development plans);
- Names and addresses of customers (current and past), vendors, subcontractors, etc.;
- Any projects, opportunities, business plans, products, and services generally not known to the public.
As you can see, if you get a divorce (or even during the course of the marriage), you are able to protect sensitive business information from being shared by your future spouse (or future ex-spouse).
Social Media Image Clause
Maybe your family business is solely a social media business, and you get all of your income from your social media. Or maybe you are a family business that is in the public eye. You wouldn’t want your future spouse and/or future ex-spouse to be posting disparaging images or content of you online, right? Probably not. Not to worry–there’s something you can do to prevent it. With a social media image clause, you can ensure your partner does not post harmful or damaging content about you online. And if they do? They PAY you a set amount of money (that you two will decide on). For example, you could agree that if either person posts disparaging content about the other on social media, they owe the other person $10,000.
Non-Compete Clause
Let’s say you and your dad created an amazing new tool for doctors to use amid the COVID-19 crisis. Your business is thriving, and you’ve divulged plenty of trade secrets and private business info related to your new medical device business. Your product is the ONLY one on the market. Well, what happens if you get a divorce? Your spouse now has all of the information on your thriving business. They may very well go out and start a competitor business or sell your information to someone who will. Not so fast! If you put in a non-compete clause, you can make sure your spouse won’t go into business as your competition with all of their knowledge.
Valuation of the Business
There are several methods for valuing a family business. Here are some of the most common methods for valuing a family business in a prenup:
Fair Market Value
This method involves determining the value of the business based on what a willing buyer would pay a willing seller in an arms-length transaction. The fair market value is typically determined by a professional appraiser who considers factors such as the business’s financial statements, industry trends, and other relevant factors.
Earnings Multiple
This method involves multiplying the business’s annual earnings by a specific multiple to arrive at the business’s value. The multiple is typically based on industry norms and can vary widely depending on the business’s size, profitability, and other factors.
Asset-Based Valuation
This method involves determining the value of the business based on its tangible and intangible assets. This method is typically used for businesses with a significant amount of tangible assets, such as real estate, equipment, or inventory.
Discounted Cash Flow
This method involves projecting the business’s future cash flows and discounting them to their present value. This method is often used for businesses with significant growth potential, but it can be complex and require the assistance of a financial expert.
What to do when you have the business valued
Once you have determined the method for valuing your family business, it’s important to include that method in your prenup in the financial disclosure section. It is crucial that you include your business valuation and the percentage of ownership you have in the financial disclosure section. If you leave this out, you could risk throwing out your entire prenup.
The Bottom Line
Whether it’s a family business or a solo venture, getting a prenup to protect a business is a good idea. From protecting the assets and income to protecting your reputation, there are so many ways you protect it with a prenup.
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: [email protected]
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