Family Matters: Can a Family Business Succeed Without a Contingency Plan for Divorce?

Originally published by Cleve Clinton.

Realizing last month that, at age 65 he’s ready to think about his family business succession plan – especially for Buxboro State Bank, Big Daddy Ernest Bux identified his checklist: Plan for Contingencies, Establish Goals, Plan Entity Structure and Transfer, Complete Estate Planning, Identify Decision Makers, Identify Successors, Determine Exit Strategy, and Implement Document Maintenance and Control. Must Big Daddy’s family business have a contingency plan for divorce to succeed?

Historical

There are 35,000 family-owned U.S. businesses with revenues greater than $25 million. Thirty-five percent of Fortune 500 companies and 60 percent of all public companies in the United States are family-controlled and account for 50 percent of U.S. gross domestic product. They generate 60 percent of the country’s employment and 78 percent of all new job creation. Given their often tenuous ownership structure, only one in three family businesses like Big Daddy’s will successfully transition from the first to the second generation.

Plan for Contingencies – Divorce

Certainly there are obvious and predictable problems with the most natural of ownership transitions. But, then, there is the risk of an unexpected death, disability or divorce. Whether “simple” and predictable or “unexpected,” how can Big Daddy expect his business to successfully transition to the next generation, much less survive early death, disability or divorce without planning for contingencies that affect him and the survival of his business?

Amazon founder and CEO Jeff Bezos and his wife MacKenzie made worldwide headlines recently after announcing their divorce after 25 years of marriage. While 54-year-old Bezos is touted as being the world’s richest man at $137 billion, more accurately, Jeff and wife MacKenzie are the world’s richest couple being residents of Washington, a community property state. A 50-50 split, would make MacKenzie Bezos the wealthiest woman in the world by a huge margin and potentially give her equal voting rights as Jeff on all Amazon issues.

Legally

In addition to death which is certain, the risk of disability and divorce must also be considered. Especially for those living in a community property state (each of which can be a little different in their application), the entity selected, the nature of the entity structure of the family business and its ownership are all affected by death, disability or divorce – what does the company’s operating agreement say how each of these changes stock ownership, voting rights and right to participate in management? For example, even if Big Daddy’s wife Anna Nicole were to get 50 percent of his Buxboro State Bank stock in a divorce, the company agreement may affect her voting power rights with respect to the couple’s ownership interest. Other legal considerations could include introducing a prenuptial or nuptial property agreement.

Practically

As to his business Buxboro State Bank, Big Daddy should confide early with his second in command and their company attorney if there is a risk of divorce. Buxboro State Bank’s general counsel will be knowledgeable of the company’s operating agreement and the implications of changes in stock ownership upon the death, disability and divorce of the owners. Also, corporate counsel may have a trustworthy recommendation for a top-flight divorce lawyer. Know, however, that corporate counsel should not be handling your divorce – both for potential conflict issues that may arise between Big Daddy and Buxboro State Bank, and also because he is not likely to have the specialized knowledge and experience of family law. Be careful to avoid divorce counsel who might prefer publicity to your discretion. Woefully, some lawyers think he or she should be the celebrity. Press conferences do nothing but gain publicity for the lawyer who calls them. Some divorce lawyers try to impress clients by showing they are tough fighters, challenging the other side’s every claim and recommendation. Yet, the court’s final property division will almost always end up just about where it would have been anyway – with the added cost of needless contention, higher legal bills and attendant family acrimony.

Familially

If there is to be a divorce, Big Daddy should take a cue from the Bezos regarding his personal affairs.  The more that Big Daddy and Anna Nicole can plan quietly with each other, work out every detail and agree on everything before the first court date, they are more likely to keep themselves – and their children – outside the view of an endlessly gossip-hungry public.

During the process of private negotiations, Big Daddy, Anna Nicole and any social media savvy children should be instructed to stay off social media. Period. All should say nothing about the pending divorce, each other, their plans or anything else. Nothing good can come of anything either spouse says publicly about the other.

Once plans are made and agreed upon, announce them to the world, including disclosures of support for each other, their children and families and projecting wonderful futures as parents, friends, partners in ventures and projects, and as individuals.

Tilting the Scales – Weighing in for the Family

Divorce can not only put day-to-day operation of Big Daddy’s Buxboro State Bank into a tailspin, it can also be a painful, crazy, complicated process for the family. If given thoughtful consideration, both Big Daddy and Anna Nicole would conclude that they and their family are better off with a financially-successful business – Buxboro State Bank. Emotionally, their family will also be better off if, when it’s over, they are able to raise their children and stay close to them into their adulthood. If you have kids, you are, in a sense, married forever. You will be their parents – together or separated – forever.

This Reminds Me of a Song

Do you remember?

”You’ve Lost That Loving Feeling” by The Righteous Brothers

Family Business Resources

At Gray Reed, we have a robust family business/family office team. I work with them to pick up the pieces when one or more of these estate planning stumbling blocks erupts into a full-fledged fight between families over their businesses, family offices and estates.

Related Tilting the Scales articles: Can a Family Business Succession Plan Succeed?

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

from Texas Bar Today http://bit.ly/2FKXBGX
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