In The Godfather, Michael Corleone says to his wife: “Don’t ask me about my business”! You may want to recall this admonition in deciding what information about a family owned business to share with a spouse.
Many times, family businesses fail because of the interference of a shareholder’s spouse. The typical scenario is one in which one of the offspring of the founder marries someone who is not involved in the business. That person makes an assumption that, due to the marriage, he or she now has a right to “run interference” in the management of the company. This often takes the form of telling his or spouse that s/he is under compensated, that s/he does not have enough of a role in management of the business, or that s/he should have a greater ownership interest. Sometimes these comments are simply self-serving, and sometimes they are genuinely believed by the non-owner spouse. The source of the sentiment, however, makes little difference if the spouse causes dissension among the family member owners and damages the enterprise. To avoid this scenario, family members who jointly own a company should implement the following.
1. If the business is organized as a limited liability company, there should be an operating agreement between the members of the limited liability company. If the business is organized as a corporation, there should be a shareholder agreement. The agreement should clearly define the roles and responsibilities of each shareholder or member in the limited liability company. It should also prohibit the employment of the spouses of family member owners. Owners of family owned businesses often fail to adhere to the legal formalities that they would adhere to if they were in business with non-family members. This is a serious error.
2. Owners should seriously consider entering into a prenuptial agreement with their prospective spouses that clearly establishes that the ownership interest in the family business is a premarital asset and is not subject to equitable distribution in the event of divorce. Growth of the business subsequent to the marriage should also be addressed vis-à-vis how it is to be treated in the event the marriage dissolves. Legal advice from an attorney with expertise in premarital agreements should be sought.
3. Finally, family member owners in a closely held enterprise should consider having a formal valuation of the business done on a periodic basis by an outside valuation firm. This will help to establish value in the event of divorce, death of an owner, or the buyout of an owner.