Are prenuptials a good idea for family businesses?

Business Leader Post, May 6, 2014

Thomas D. Davidow, Ed.D.

Yes they are–conceptually. The primary goal of the prenuptial should be to protect the stock of the business. It is certainly a reasonable stance to discuss keeping the stock in the bloodline to protect against a hostile stock holder who might emerge as a consequence of a divorce. The prenuptial can include financial fairness and security for the new spouse while still protecting the family’s most important asset.

Prenuptials are also excellent vehicles for older adults who are re-marrying and have adult children. A prenuptial can protect the new spouse's future economic or financial status; define the financial responsibility; and protect/define the wealth set aside for the new spouse and for the children/grandchildren of the original nuclear family.  This takes wondering and fantasizing out of the equation and can reduce any potential resentment towards the new spouse. It is my experience that the prenuptial for older adults does not come with a lot of resistance.

The prenuptial for a younger couple is a much more emotional and difficult topic to surface.  It flies in the face of romantic feelings that young couples bring to their marriage. It is usually handled poorly with last minute conversations and can exacerbate underlying tensions between the two families, especially when one family is wealthier than the other.

The message of a prenuptial is in contradiction to the issue of trust, which is the essence of a good marriage and sound relationships. The message that the family is only trying to protect the stock can be too subtle a distinction for the emotion that gets triggered.

There are no answers to eliminate the harsh message, but there are ways to attempt to mitigate the emotional response. Parents need to set a rule early on that all future spouses will have to sign a prenuptial. That rule should come with a detailed explanation of the reasons why. The concept of the prenuptial ought to be introduced early on in the engagement process to avoid as much surprise as possible. It's important to have sufficient time to discuss the agreement and to integrate the idea that it is a fair and reasonable document that offers some comfort to the spouse so that s/he and/or any future children will be protected in the case of a divorce.    

The best laid plans can easily go awry, especially when the parents of the future spouse who is being asked to sign the document are insulted by the request.  When that happens, back off. You will be pursuing a losing proposition action that will have ramifications over the lifetime of the marriage. A more expensive and effective vehicle for the protection of the stock is a buy/sell shareholder’s agreement that defines who can own the stock.  That will also reduce the chances of a divorcing spouse holding the family business “hostage” for a larger settlement.