On behalf of The Law Offices of Mary Ann Beaty, PC posted in Prenuptial Agreements on Friday, February 17, 2017.

A family business may be one of the casualties after a divorce. One spouse my not be able to buy out the other spouse, forcing excessive debt on or the sale of the business. But, a prenuptial agreement or other precaution may save the business.

A prenuptial agreement protects a spouse’s interest in the business, even in a community property state, such as Texas. In these states, any property acquired during the marriage becomes marital property that may be divided.

The agreement must be a written document, executed in front of witnesses before marriage. Assets must be fully disclosed and the agreement may not be unfair or oppressive.

Instead of a prenup, parties entering a marriage may enter a buy-sell agreement. These agreements, known as buyout agreements, are contracts between the co-owners of the business.

Buyout agreements specify what happens to the business if a co-owner dies, voluntary leaves or is forced out of the business. An effective buyout agreement requires a former spouse to sell any interest received in the divorce settlement back to the owners of the business at a sale price established by a valuation method.

A trust can also protect the business, if a later generation undergoes divorce. It usually does not protect the business when current spouses divorce, but is favored in a high net worth divorce for future generations.

One other method is for the spouses to remain as business co-owners after divorce. This is easy because it involves less legal work, but it may be more emotionally difficult as the parties go through the trauma of divorce and must still work together. Under this option, the parties should enter a shareholder agreement that allows either spouse to buy out the other spouse at an agreed-upon price.

The parties can also agree to divide the profits from the sale of the business. If the sale is quick, both spouses will have funds to pursue their own lives and cut off financial ties with each other. However, the parties must continue to have a business relationship until any sale is final.

Drafting a prenup agreement or a business agreement may have long-lasting consequences. An attorney can help spouses protect rights and intentions.

Source: MarketWatch, “How to protect your family business during a divorce,” Daniel Thompson, Feb. 10, 2017