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What happens in family businesses when marriages/partnerships break up?

November 3, 2016 Articles, Business & Commerce, In the news No Comments
family businesses

Philip Pryor ©2016

Families are complex. Then when significant assets and money are added to the equation, they become even more complex.

Juggling family relationships and money, especially over generations is no simple task. While blood is very much thicker than water, sometimes money can really thicken things up to the point where everything just stops working.

Recently I’ve been investigating the use of Binding Financial Agreements (BFAs) for family businesses – these are the things we used to call ‘Pre-Nups’, when family members take spouses. After many hours talking to lawyers as well as families who have gone down this road, I realised it is a far more complex process than first thought.

It’s just not a simple legal issue.

Even lawyers cannot agree on what needs to be done. There are a range of opinions on the possibilities. Some lawyers are very confident BFA’s will do the job and there are others who are hedging their bets. It’s clear that one of the key success factors is how they are negotiated and implemented by the family. However, be warned, there are no guarantees.

I’m not a lawyer and so please do not take this material as legal advice. However, what I hope to provide is some food for thought. There are no hard and fast answers. Each family is unique and even different siblings in the same family may need to be treated differently.

The aim of a BFA is to protect the core family assets if a family member’s relationship or marriage breaks up – and let’s face it, the statistics tell us there’s a 50/50 chance of that happening.

The core idea of a BFA is to get the family members to politely ask the love of their life, before they get married or have been living together for more than two years, to sign a document that restricts what they are entitled to if the relationship goes south. That’s a big ask!

Looking at it this way, it seems to be a pretty cold hearted affair with not a lot of respect for love and relationships. However, on the other hand, it is perfectly understandable for families to want to protect their core assets for future generations.

However, this is not the whole picture by any stretch.

Let me unpack some of the issues.

Firstly, in some cases, a BFA is just not appropriate for some families – this is where the family leaders need to talk to someone who knows both about families and about business. In some cases, it is as useful to let the situation play out over the years without a BFA and see what happens. I know some families who have consciously done this. Note the word ‘consciously’ in that last sentence.

Secondly, a BFA is helped enormously by having a good family charter in place – and since only around 10-14% of family businesses have a family charter in place, this is something that families need to get their heads around.

To be clear, a BFA can work without a family charter. However, having full agreement across the family (including and especially the in-laws) about what the philosophy of the family is, the future of the family, the legacy wishes of the family and how the family wants their money to help and support future generations, is a huge benefit.

In fact, BFA’s are actually a section unto themselves in a typical family charter. It’s not an easy conversation but it’s a whole lot easier doing it now than in the middle of the emotional storm of a relationship breakup.

Thirdly, time makes a big difference. A BFA has a potentially different meaning for a relationship that has been in existence for four years versus 34 years – the courts take note of this.

Fourthly and probably most importantly, no one wants a BFA to negatively affect family life or family relationships. Family relationships are vitally important to be maintained, both for the sake of the family and the business.

The challenge to the family leaders becomes; “How do you even introduce the idea of a BFA to the kids?” Then, “How on earth do you get their beloveds to sign on the dotted line when it clearly looks like they are potentially signing away a fortune?”

If we only look at the situation legalistically, then family leaders are in the land of the difficult and sometimes relationship-damaging conversations. Also, any sign of coercion especially towards in-laws is one of the key ways to have a BFA legally invalidated.

The legal viewpoint alone does not work so well. One has to look at the relationships and what it actually means to be a family – to be your family.

What family leaders have to bring to the situation, is a clear and open sense of fairness, transparency and communication.

In terms of “fairness”, the main message about a BFA from most families to the next generation and their partners, is to protect the core family assets for the benefit of future generations. It’s not to screw them over or deprive them unfairly. In terms of “fairness”, there’s usually a distinction between the assets of the original family and the assets of the next generation couple. It feels a lot fairer if the assets of the next generation couple are kept separate from the BFA.

Note there are many other ways this can be done, this is but one example. It depends on a number of things including the way a family has set up their finances. Regardless this is where a family charter really helps.

When starting down the road of a family charter, a family needs to have open and frank conversations about their assets and what they want to do with them. This starts with the family founders thinking about their legacy, what they want for future generations of the family, and what is going to happen with the business/assets.

It’s gaining clarity and full acceptance from all the family – including in-laws – around this legacy that is important. This is where communication and transparency is important.

While a family charter is not a legally binding document, if it’s based on honesty, fairness and a level of transparency, it is emotionally binding – and this can be a very powerful thing.

While not a guarantee, chances of a good outcome are improved by having the family in agreement around legacy and future benefits to the family. Then, if there is a relationship breakdown, everyone knows where they stand. They have already agreed it’s fair and while there may be some negotiation required, much of the groundwork has been done and agreed to – making the negotiation easier and with a greater likelihood of success.

There are no guarantees in this process. However, for family businesses, relationships are important. Honest, sincere conversations leading to consensus agreements significantly help in this process. Without them, we are forced to revert to a legalistic approach that clearly has its down sides – to adapt a phrase from a certain well known ex-president, “it’s the relationship, stupid”.


 

 

 

Philip Pryor is the Principal of Morphthink Pty Ltd which assists family leaders design and implement strategies to successfully manage their businesses and families. Contact: Philip@morphthink.com


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