Prenuptial agreements increase likelihood of family business failure

Prenuptial-AgreementThe rule of thumb is that 50% of marriages end in divorce, and the probability is over 75% if you run a family business. The added stress of managing a business and working with in-laws can negatively impact a marriage. Although family businesses lag societal trends due to their conservative values, the number of family business divorces is quickly catching up to the mainstream. Within the next decade, more family businesses will become insolvent due to complications caused by divorce than any other reason. Divorce is more likely to impact a family business than all other risk factors combined.

Because of this trend, many families are circling the wagons, trying to retain family wealth. Yet, I would argue that the fear of divorce is a bigger problem. I have insisted on family business owners getting prenuptial agreements signed and might still do so in the future. I could equally argue against the notion.

First of all, almost any lawyer will tell you that prenuptial agreements don’t always hold up in court. The same lawyer arguing that a prenup is a legally binding agreement will two hours later argue the exact opposite for another client. The law is gray on these matters.

More importantly, I’m concerned about preventing the divorce. A prenuptial is actually a big precipitating factor.

When a bride or groom signs a prenup, he or she feels excluded emotionally from the success of the family business and emotionally detached. You’ll often see that when a prenuptial is signed, the ousted spouse isn’t driven to see the family business succeed because someday they might be shoved out.  They are more likely to seek employment outside of the family business because they are looking out for their own career instead of putting equal effort into helping the family business grow.

Commitment is what makes a family business succeed. The person that signs a prenup which states they get no part of the family business when they divorce has no skin in the game and no affiliation with the family business, and thus no commitment to making the family business succeed.

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