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The odds sound grim, but the research data confirm them. Today, young men and women will likely have more spouses than children. Unfortunately, the implications for family enterprise are severe, and each family has its own special tale of woe.
A golfing friend of mine recently shared his family's story. His stepdaughter and her husband are divorcing, each having found a new playmate. They jointly run the family business, and the new dynamics are nasty. Their mom, who retains voting control, blames her daughter for the breakup and has greater respect for the vision and business acumen of her soon-to-be ex-son-in-law.
ONE MEETING, TWO HUSBANDS. So Mom decided to fire her daughter, put her soon-to-be ex-son-in-law in charge, and even give him some stock to ensure that he does a good job. She is also leaving the ownership of the business jointly to her three children and, to prevent boardroom battles, she is giving the soon-to-be ex-son-in law the option to buy them out.
As for me, my most troubling family-business experience took place at a board of directors' meeting several years ago in New York City. I was invited to help the family consider issues concerning continuity planning -- the succession of leadership and ownership in its family-held enterprise -- and was introduced to the board members sitting around the table. Most were siblings or cousins. Also at the table, directly across from the president (who is a fourth-generation great-grandson of the company's founder), sat a fairly new board member: the president's ex-wife's second husband.
After a few minutes of witnessing the tense and hostile dynamics between Husband 1 and Husband 2, my mind started racing. How did this happen? Hadn't they made a prenuptial agreement? Wasn't there a shareholders' agreement? How did the president's ex-wife end up with enough voting stock so that her second husband could gain a board seat? Sure, many of today's families are blended, extended, and even mended. While in many instances it all works out fine, this seemed to carry the notion of "family business" a bit too far.
A ROUNDABOUT ROUTE. Still, preventing extend-family members from holding stock in the family business is not always the wisest decision -- even if it is a bit tricky to work out. Take the case of a former client of mine. Her daughter-in-law has the right values, leadership style, and personality for the family business. She also makes a brilliant strategist and salesperson. According to her mother-in-law, she is the person most responsible for the company's exponential growth.
Yet, when it came time to pass ownership to the next generation, Mom was acutely aware of the statistical risks of divorce -- and thus reluctant to share ownership with her daughter-in-law. So, she opted to sell her son a larger-than-expected share to make up for what she felt her daughter-in-law deserved. Although the two women have a fine relationship now, it had its tense moments along the way.
Certainly we cannot guarantee the marriages of family members will endure or that the employment of family members will last forever. But we can take certain proactive steps to minimize the loss when relationships don't work out as intended.
BUYBACK OPTION. We all know families with second and third marriages and even some in which the ex-spouses and their new mates stay the best of friends. In some of these families, the ex-spouses still share business interests and work effectively together on a daily basis. But before embarking on any such venture, all parties should know that sound legal advice is crucial. My friend and colleague Jeffrey Wolfson, an attorney with Goulston & Storrs in Boston, offers some thoughts.
"The best solutions are a prenuptial agreement and a shareholders' buy-sell agreement. And to play it safe, one may even want both, though both agreements require some up-front effort," says Wolfson. "A prenuptial agreement seeks agreement on how the marital assets will be divided if there's a subsequent divorce. To make the agreement enforceable, the terms have to be fair, and each spouse is entitled to an attorney and to fair disclosure.
For these reasons, whether or not you have a "prenup," it's wise to have a shareholders' buy-sell agreement, says Wolfson. This agreement gives the corporation or the other stockholders the option to buy back the family-business stock if it would otherwise be transferred as part of a divorce decree.
AN OUNCE OF PREVENTION "Many families agree that this is a small price to pay to avoid having a possibly disgruntled ex-spouse as a partner in the family business, requesting financial information on the company, and possibly seeking dividends and a seat on the board of directors," points out Wolfson.
"But, as with the prenup, it will be subject to court review, so consider paying fair market value for the shares and having the spouse consent to the agreement in writing up front. Without such agreements as protection, the owners of one department-store chain wound up paying their ex-daughter-in-law a hefty premium in order to buy back her shares."
Overall, the best way to prevent in-laws from turning into outlaws: Proceed with caution -- and always remember that "'till death do we part" doesn't mean what it used to. A compatible fit of style, values, personalities, and vision might help. But most important, work with a good attorney -- before you have to.
Paul Karofsky is Executive Director Emeritus of Northeastern University's Center for Family Business, and a member of the Family Firm Institute. A former third-generation family-business owner, he's currently the principal of Transition Consulting Group in Boston, where he advises families, businesses, and educational organizations
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