Is your family business ready for a boom in marriage proposals?
Recent reports in Forbes and CNN.com Business have predicted a steady increase in marital engagements in the next few years. While an engagement is a happy event, in family businesses the news raises concerns about the potential impact on the family enterprise should the marriage fail. The entire family could be affected if the divorcing member needs to access money for a divorce settlement. Stock redemptions or other hardships, such as disputes over valuation, division of other family assets, management distractions or the introduction of new outside investors because of a forced sale of shares, may impact the enterprise and current and future owners, as well as the family legacy.
Prenuptial or premarital agreements (“prenups”) are used in family enterprises to help safeguard the individual's and the family's assets and to provide guidance and structure in unforeseen circumstances. When crafted well and tailored to the unique circumstances of the marriage partners and the family enterprise, prenups bring a sense of clarity, understanding and security for all involved.
That said, prenups are among the most unromantic mood killers that exist. Poorly managed prenuptial agreement discussions can damage relationships between the engaged partners and between the couple and other family members.
That's why it's so tempting to avoid talking about prenups. Rather than succumb to temptation, you should raise the issue in a straightforward way that mitigates tension. The best approach is to develop a family prenuptial policy requiring all family members to execute prenuptial agreements. If it's understood that the policy applies to everyone in the family, broaching the subject before marriage will be less likely to be taken as a personal affront.
A family prenuptial policy provides important benefits:
It enhances the alignment of family values. A well-considered family prenuptial policy connects marital and family relationships to values such as hard work, commitment to the family enterprise, financial responsibility and stewardship for future generations.
It creates a foundation of consistency and fairness. A policy sets the expectation of how the family will address the financial aspects of divorce. This provides for a consistent approach and mitigates the risk of negative outcomes. It may enhance trust across the family because everyone understands the reasons for the policy and what is expected of family members and their spouses.
It helps to preserve family wealth. A prenuptial policy doesn't just protect the family business. It also clearly defines personal assets, family assets and business assets. It's an essential tool for maintaining equity across the family while safeguarding the enterprise and the family's wealth for future generations.
Prenups for a second or subsequent marriage present additional challenges. Each of the partners is likely to have children from previous relationships as well as assets they will want to protect.
Experience from their prior marriage influences each partner's approach to prenup discussions. Respect their experiences to set the stage for productive conversations and constructive planning. Focusing the conversation on financial, retirement and estate planning rather than solely on the prenup puts the emphasis on long-term planning and security rather than the potential for marital discord.
A tale of two families: Beginning the prenup conversation
The Richards and Jones families are both highly successful multigenerational business families with strong wealth preservation and legacy goals. However, they managed their prenuptial agreement situations very differently.
The Richards family took an informal approach to family governance and policies. They first recognized the need for a prenup when the oldest member of the third generation, Aaron, became engaged. Aaron's uncle Jeff —brother of Aaron's father, Brett — had undergone an especially challenging divorce. Jeff confronted Brett, Aaron and Aaron's fiancée at a family gathering, insisting on a prenup. That was the first time prenups had ever been mentioned to Aaron. The couple were insulted and hurt. Things spiraled from there.
The Jones family's experience was the opposite, though they also had had their share of challenging breakups. They communicated the expectation for prenup agreements well before the next generation's relationships evolved into proposals.
Family education and retreat programming. Jones family retreats included educational and talk-back sessions on topics such as financial management and stewardship of the family enterprise. This provided many opportunities to discuss the family's prenup policy. Their post-high schooler NextGen program covered prenups as well as other legal and financial management topics, setting expectations early. Everyone heard and absorbed the same information (which was presented in a non-threatening manner) without feeling singled out.
Key ages and stages. There are natural points in life when introducing or reinforcing the topic is appropriate. The Jones Family Council recognized the opportunity to raise the topic of prenups when they saw relationships becoming more serious — and even before that, when a young adult expressed a desire to find a partner. The family planted the seeds and talked in depth about prenups as opportunities arose.
New ownership. Whenever equity transfer planning occurred, the prenup policy and the Jones family expectations were part of the conversation, even if the NextGens were not currently in serious relationships. This deepened their understanding of shareholder agreements and importance of prenups and helped the young adults to understand that owners have fiduciary and stewardship responsibilities.
Premarital counseling/estate planning conversations. Premarital counseling was offered to couples in the Jones family, giving them an opportunity to organize their financial and legal plans as a couple in a private, facilitated environment. The family provided an introductory meeting with an attorney to educate the couple about the specifics of drafting an agreement without any pressure to share information or hire that attorney. Topics included banking, life insurance, prenups and estate documents. This gave the couple time to process the information before hiring their own attorneys.
Starting the process
The ideal time to bring the topic back up for specific action is soon after the relationship has been acknowledged as serious and again shortly after the engagement, before wedding planning kicks into high gear. This enables the couple to talk through their individual and mutual financial planning issues and responsibilities before the pressure of the wedding process overwhelms them.
Conversation with the family member. The Jones family picked a time when the conversation could take place in private and ensured that both parties knew ahead of time what the discussion was about. The parents prepared so they could handle the conversation with compassion, empathy, sensitivity and understanding. They focused on the value and benefits of a prenup for the couple and the family, protecting the family enterprise interests for generations to come.
Conversation with the future spouse. Introducing the topic to the future partner needs to be handled with care and sensitivity. Ideally, the couple will have discussed the concept of a prenup prior to their engagement. Choose a time when both partners are relaxed and not distracted by other matters. The Jones family was coached to approach the conversation in a positive way, know what they want to say and anticipate possible reactions and questions.
Defusing tension
It's human nature. Prenuptial agreements breed tension. People gravitate to the negative. The prenup issue arouses fears around trust, commitment and prioritizing the family enterprise or wealth over the relationship.
Here are some things the leading generation can do to mitigate tension and defensiveness:
- Create a safe space where family members can share their concerns, fears and questions without feeling judged.
- Model honesty, transparency, patience, and empathy.
- Reinforce love and support for the relationship and its future.
- Initiate crucial conversations about potential unforeseen circumstances. Reinforce how discussing these scenarios in advance establishes a foundation for more fair and amicable separation agreements.
- Leverage routine educational opportunities to normalize expectations and empower individuals to make informed decisions.
- Encourage partners to seek professional legal, financial and/or premarital advice.
- Invite leading-generation family members to share their own experiences regarding how they crafted their agreements — not out of mistrust, but for meaningful financial planning.
- Acknowledge the couple's autonomy and respect their privacy.
- Consider using a professional facilitator to help family members constructively manage their emotions, guide conversations and mediate conflict.
After the Jones family had finalized their prenup policy, they needed to introduce the new policy to their family members who had married before the policy was developed. It was touchy. To clearly communicate and educate these couples on the policy and its place in the overall enterprise governance, they held family meetings/educational sessions. They emphasized that the policy would provide consistency and fairness for the future and discussed how it would align and support the enterprise values, vision and goals. They stressed that the policy should not be considered to represent a judgment of any one individual, prior circumstance or decision.
Not all family enterprises have prenuptial policies or programs, and even if they do, some branches may not have broached the topic with their NextGens. The announcement of an engagement may be the trigger for doing so. Don't delay talking with the couple while the family develops its policy. Start the conversation shortly after the engagement. Then go to work to develop a family prenup policy and education program to support the family enterprise success for generations to come.