Checking business solutionsSavvy business owners include plans for what happens if a partner dies or wants to leave the partnership in their business formation documents. Married couples in business together are wise to make the same plans. There are three critical terms that married couples should consider including as provisions in their business formation documents.

1) A Buy-sell Agreement

A buy-sell agreement requires one party in a business, upon a triggering event, to sell, and the other party in the business (or sometimes the business itself) to buy, that ownership interest. A typical ‘triggering event’ is an owner withdrawing from the business, whether the withdrawal is involuntary, such as in the event of death or disability, or voluntary, such as retirement. In the event of death or disability, the purchase under a buy-sell agreement is often funded by life and disability insurance and is part of succession planning.

Thinking about the possibility of premature death or disability is important. Life and disability insurance should be a major consideration. But for married couples, getting these types of insurance won’t necessarily be in connection with a buy-sell agreement. Married couples can typically handle their insurance needs within their own family and estate planning and separate and apart from their business relationship.

For married couples who own a business together, the buy-sell agreement is important because it is a way to safeguard the business from harm should the marriage relationship break down. No one expects to find themselves in divorce proceedings, yet statistics show that some couples will. Not surprisingly, family-run businesses tend to suffer during a divorce. Putting a buy-sell agreement in place up front allows the couple to decide on a fair way for each of them to receive their portion of the value of the business in the event of divorce, but before divorce is even on the horizon. If divorce becomes inevitable, the couple and the business will have already negotiated a way to avoid the cost and uncertainty of divorce court proceedings for their business before the feelings of mistrust and fear, which divorcing couples usually have, complicate the decision.

A buy-sell agreement for a couple operating through a limited liability company (LLC) can be contained in the LLC’s operating agreement. (The focus of this article is on limited liability companies (LLCs), because the LLC has become a commonly used business entity for closely held family businesses. These considerations, however, would also apply to corporations, subchapter S corporations or business partnerships.)

2) A Non-Solicitation Clause

The value of a business is often built over years of developing relationships with employees, customers, and referral sources. In the event that a couple decides to exercise a buy-sell agreement as part of the decision to divorce, the spouse that purchases the other spouse’s interest in the business will presumably want to continue to operate the business and maintain its value.

The business could be negatively impacted, however, if the withdrawing spouse immediately starts a competing business that solicits the employees, customers, and referral sources from the existing business. To mitigate the risk, “non-compete” or “non-solicitation” provisions are often paired with buy-sell agreements to protect the value of the business following the completion of the buy-sell provision.

3) A Pre or Postnuptial Agreement

Couples in business together should consider what’s called a “postnuptial agreement” (or if they are not yet married and are intending to marry, a “prenuptial agreement”). In such agreements, the couple can agree to have the buy-sell provision in their operating agreement control the division of the business in the event of divorce. In the absence of a pre- or post-nup agreement, a business will be considered part of the couple’s marital estate and, if they decided to divorce, will be subject to the marital property distribution in family court. This subjects the business to the uncertainty of divorce proceedings and interferes with the operation of the buy-sell agreement in the business formation documents.

A couple in business together may also wish to enter into a pre- or postnuptial agreement so that they can commit to an understanding that if they ever get to the brink of divorce, they will both hire attorneys experienced in and willing to use collaborative divorce proceedings to reach a martial settlement agreement. Click here to find out why a collaborative process is ideal for negotiating pre- or post-nuptial agreements as well.

An agreement to use collaborative divorce proceedings will keep things out of court. When it comes to divorce and owning a business together, going to court can be extremely disruptive to the ongoing operations of the business. In collaborative divorce proceedings a couple is guided by their individual attorneys to consider all of the options for the business, including exercising the buy-sell agreement or crafting a strategy for both parties to stay in the business post-divorce. The couple is much more likely to cooperate to keep the business healthy and profitable during the divorce process.