An Argument for a Business Prenup (Business Planning)

In marriage, the parties agree to come together “till death do us part.” In business, although these words are not recited as such, the parties usually intend the same commitment. Nevertheless, the statistics tell us that many marriages fail and end in divorce. Similarly, and as any lawyer who has been in business for even a few years will attest, many “business-marriages” (partnerships and limited liability companies) fail and “end in divorce.”

When a marriage fails, the parties divorce which is usually attended by a great deal of acrimony. Much of the acrimony revolves around three things: (1) custody of minor children, (2) the division of assets, and (3) child and/or spousal support. Similarly, when a business-marriage fails, the parties often separate (divorce) which is also often attended by a great deal of acrimony. Similar to a divorce, much of the acrimony revolves around three things: (1) who gets the customers (i. e., “custody of the minor children”), (2) the division of assets (equipment, premises, inventory, intellectual property, etc.), and (3) repayment of capital, loans, and/or buy-out of an ownership interest (i. e., “child and/or spousal support”).

Now, and I readily admit, a prenuptial agreement is not romantic or sexy. No way around it. And a prenuptial agreement by itself will not decrease the hurt, pain and disappointment of a failed marriage. And I also admit that invariably, even though the parties “agree” to the prenuptial agreement, inevitably one party is disappointed by the bargain. But notwithstanding all of the foregoing statements, the parties do get one thing in return for a valid and binding prenuptial agreement: at a very difficult time they know what to expect. And at a time when they are likely only speaking through their lawyers, and cannot seem to agree on anything, at least they are not forced to start negotiating the economic terms of their divorce. And ideally, while they are “falling in love,” and getting along, might be the best if not the only time to contemplate, negotiate, cooperate, and document the economic terms of their divorce. It’s not romantic or sexy, but it sure might come in handy.

Doesn’t the same hold true for business partners? While they are “falling in love,” and getting along, is it not the best time to contemplate, negotiate, cooperate, and document the economic terms of a potential “business divorce.” Who gets the “minor children” (i. e., the customers)? If one party operates the business (the “business operator partner” or “BOP”) and the other party is “the money partner” (or “MP”) it might make sense to give the customers to the BOP where the MP really has no ability or interest in operating such a business. And to reciprocate, maybe the MP should get some of her money back on a preferred basis, likely paid out over time while the BOP continues to run the business which may the only hope for both the BOP and the MP to recover their respective investments. The provisions could be put right in the partnership agreement, or more like the operating agreement given the ubiquitous use of the limited liability company as the business vehicle of choice these days.

You see as unromantic and unsexy as the business prenup provisions will no doubt be going in to a business marriage, it may be the parties’ best if not only chance to save the business, their INVESTMENTS, and as a result their relationship (professional or personal). After all, a business unlike a marriage is about making a profit, making a living, you know, it’s about money. Generally the parties may love the business, but they do not usually go into the business seeking to fall in romantic love with their partner. Human feelings are just so darned complicated. It is no wonder why divorce is so difficult. And while the same humans-with-feelings are the ones going into their business-marriages, the absence of that “love thing,” and the absence of that “sex thing” should be a big help in allowing the parties to focus in a constructive way on that “money thing.”

Why this article you may wonder. Why now. Well, just last week, I was referred another client whose business marriage has pretty much failed. And as always seems to be the case, there was no business prenup contemplated much less negotiated and documented. And even though their entire respective investments of time, energy and money are now on the line, the parties seem to have difficulty sharing a rational thought right now, much less able to see the forest for the trees.

So next time you fall in love (business style) and get to the point where you decide to go into business “till death do you part,” take some time to at least contemplate the economic terms of your separation should your business-marriage not survive. It might just be one of the best decisions that you and your business spouse make.