The Importance of Prenuptial and Post-Nuptial Agreement for Persons owning an interest in a Closely Held Business

Prenuptial and post-nuptial agreements (signed sometime after the marriage vows have been taken) should be of particular interest to persons who are owners or part owners in a small business.  There are sound and substantial business reasons for married couples and those contemplating marriage to consider the preparation of a prenuptial or post-nuptial agreement.

Under existing law, a business that is acquired by one party to the marriage during the marriage constitutes marital property.  In divorce a valuation of that business will be done by one or more professionals to determine the value of the business to the spouse who holds a direct interest in that business, and some portion of that interest will then be allocated to the non-titled spouse in recognition of his or her “indirect contribution” to the business owner’s success. A common example is a spouse who may never have set foot on the business property, but nonetheless cared for the children, the household, entertained prospective clients, and in other ways created an environment that assisted in the business owner’s success.  Obviously, where the marriage is long term and the business successful, the amount owed to the non-titled spouse can be quite significant.  That circumstance can cause liquidity issues for the business holder.

In many instances the titled spouse is only a part owner in the business.  While being a part owner will suppress the value assigned to the business, and while it is very unlikely that the non-titled spouse will actually be invited to a place at the table as a part owner themselves, particularly if the closely held business has followed generally accepted business management policies in the drafting of legal documents pertaining to the business, nonetheless the non-titled spouse’s share can be sufficiently high so that it is impossible for the titled spouse to produce the necessary cash immediately to occasion “the buy out” of the non-titled spouse.

Additionally, the business valuation process by its nature requires an intrusive interference with the day to day functions of the business.  Accounting and business valuation experts pore over years of business records, visit the facility, and undertake other tasks in the exercise of due diligence in order to properly value the business as if it were to be sold in the open market.

Even where the business is owned by the titled spouse prior to marriage, the examination may well proceed to determine the non-titled spouse’s interest in the appreciation of the business since marriage. That requires an expert to express an opinion as to the date of marriage value of the enterprise, and the business owner’s share therein, and to compare that with the value of the business owners’ share at the time of the filing of the divorce action.

Therefore, appreciation on the business may still be a marital asset subject to distribution, even though a business may have been in the titled spouse’s family for generations.

Business owners increasingly wish to avoid such a lengthy and obstructive process, and seek to “make their own deal”, in advance, to be pulled from the drawer and dusted off only in the event of ultimate divorce.

Just as closely held businesses find it valuable to purchase life insurance sufficient to buy out a deceased partner’s share in the business in order that business operations may move along in his or her absence, business owners would do well to consider the preparation of a prenuptial or post-nuptial agreement that addresses the similar issue of the divorcing partner.  Such agreements may be self-tailored to address only the business interests themselves, or more broadly crafted to address other property interests and maintenance as well.

While it is certainly the case that a prenuptial or post-nuptial agreement can be written in draconian fashion so as to exclude one party and empower the other, fairly and properly crafted documents may instead attend to each person’s interests  and sense of what is fair and just.

There is much case law to support the principal that courts welcome a couple’s effort to fashion their own deal.  Such agreements, introduced at the time of divorce, will be read according to standard principals of contract law, albeit with some of deference to the “special relationship” that the marriage “business” entails.  Those agreements that include full and honest disclosure prior to the execution of the agreement, sufficient opportunity for both parties to operate with the advice of counsel, and under circumstances that do not in and of themselves create undue pressure on the later divorcing couple will be enforced.

Divorce is a difficult, emotionally charged, and stressful undertaking. A prenuptial or post-nuptial agreement will not alleviate all of this stress and little of the emotion.  But such an agreement, crafted in the light of happier times, may make far more simple the effort of fairly establishing one’s rights to maintenance and the appropriate allocation to a non-titled spouse of his or her share in both pre-marital and post-marital business interests.

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