business succession planning

I usually discuss prenuptial agreements on my Indiana Divorce and Family Law Blog. I use Google news alerts to keep track of news on prenuptial agreements and that is why I am writing about them on this blog. The latest alert came laden with references to stories from the business page. This might be a trend as an earlier post here mentioned. Certainly, it is good for the business writers to acknowledge the importance (and impact) of family law on businesses.

The New Hampshire Business Resource has a fairly good article Protecting your business assets with a ‘prenup’. I do take issue with part of the following paragraph, though:

Stock in a family business owned by one spouse is marital property, and absent a valid prenuptial agreement would technically be subject to division under New Hampshire’s statutes. As a practical matter, however, it is unlikely that a court would order one spouse to transfer shares in a closely held business to the other spouse upon divorce, since judges and marital masters are mindful that post-divorce joint ownership of a business venture is unlikely to succeed. Accordingly, the court is likely to award all shares of stock in a closely owned family business to the spouse related to that family.

After nineteen years, I think that anyone can say what any judge will do about any matter in any particular case. Judges in divorce cases think that if both parties are equally angry then they have done a good job. What makes a prenuptial so useful is removing the surprise inherent in any judge's decision of what makes an equitable division of property.

I got to admit that I have an aversion against partnerships. I think most attorneys do not like them. Why? Liability. Law school beats us over the head to avoid liability for our clients as much as possible.

Partnerships ooze with liability issues. From your partner's creditors seizing business assets for his debts to your assets being on the line for business creditors, partnerships just scare lawyers. Maybe a partnership between corporations or limited liability companies or between a corporation and a limited liability company.

With all these problems with partnerships why have one with a spouse? Because partnerships can be implied by actions as well as by a formal agreement. Two spouses start a business and even without a formal agreement, a partnership can be created by their acts. Of course, the husband and wife have probably not even thought of talking to a lawyer about the kind of problems they might be getting themselves into. Why spend good money that could go into the business?

If anything goes wrong with the business, then business creditors can go after all the joint assets. Since most businesses fail, what do you think now of not talking to a lawyer?

What would chatting with an attorney accomplish? I repeat that most attorneys would get the business set up as a corporation or a limited liability company. If the clients were adamantly committed to a partnership, then there would need to be a partnership agreement.

If the clients want to keep the business running as long as possible, they need to consider all of the problems including divorce. I think the equivalent of a prenuptial agreement (or a post-nuptial agreement, if already married) needs to be considered regardless of the business type used by the husband and wife. With a partnership and limited liability company having a written document (and a LLC requiring a written operating agreement) setting out how the business shall be run, incorporating some of the prenuptial/post-nuptial's terms does not seem out of place. Based upon that reasoning, they need a separate prenuptial/post-nuptial agreement if the business is to be set up as a corporation.

Then they need to consider their retirement and estate planning objectives. If the business entity is a partnership or a limited liability company, these objectives need expression in the partnership agreement or the LLC operating agreement and for corporations in a separate document.

Here I am looking over FranchiseLawBlog when I see Wendy's Franchisees Missing Dave. Frankly, so I have. Reading I see that others also have a similar complaint that I have:

Meanwhile, I really think the Wendy's advertisements are about the worse out.

New York Business Divorce has been publishing a series on a New York business dissolution case under the title Anatomy of a Dissolution Slugfest. I think all are worth reading for anyone setting up a business or wanting to get out of an existing business. I wish I could say that all problems would be solved with proper planning but not all problems can be contemplated and planned for - just that things go better when an attempt is made.

Thje following is from Anatomy of a Dissolution Slugfest: Part I:

"Question: What do you get when you take a luxury automobile dealership consisting of multiple corporations and limited liability companies, stir in three business partners, add contradictory documents concerning one partner’s ownership interest, season with a federal indictment of that same partner for stock fraud following which the other two partners freeze him out of the business, top off with a pair of litigators and bring to a boil?"


Anatomy of a Dissolution Slugfest: Part V contains descriptions (and links to the subequent parts) of the remainder of the series:

...Part II (read it here) covered some additional issues raised in the court’s initial decision including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment. Part III (read it here) highlighted portions of the court’s June 2007 decision in which it denied Marciano’s motion to compel payment to him of distributions pending the litigation and granted his motion for leave to amend his complaint. Part IV (read it here) addressed the court's September 2007 decision in which it denied defendants' motion for summary judgment contesting Marciano's share ownership and arguing that Marciano's March 2007 guilty plea to unrelated stock fraud charges justified their excluding him from the business operations.

This Part V examines the court's final decision dated December 7, 2007, concerning a new twist in the proceedings triggered by the defendants' assignment of a valuable dealership lease held by a company co-owned by Marciano to another company owned solely by the defendants. A postscript follows for readers interested in the outcome of the case and some reflections on its greater meaning.

With baseball season now starting, I think The New York Times' Oedipus Bronx might have even a bit more relevance.

Do you have your business' future planned? Sell out? Leave it to family members?

Here is an article from the Canadian Financial Post with some ideas. Passing the keys to key staff.

The point is to have a plan.

Please contact me if you have an Indiana business and want to set up a succession plan for your business.

Keep in mind that a business is property. Indiana divorce law presumes a 50-50 split of the property.

Here is a current statement of the law from Frederick v. Frederick (NFP opinion 10-24-2007, PDF format):

oncerning personal goodwill and enterprise goodwill, our supreme court has held:

[B]efore including the goodwill of a self-employed business or professional practice in a marital estate, a court must determine that the goodwill is attributable to the business as opposed to the owner as an individual. If attributable to the individual, it is not a divisible asset and is properly considered only as future earning capacity that may affect the relative property division. . . . [T]o the extent a business or profession has goodwill (or has a value in excess of its net assets) it is a factual issue to what extent, if any, that goodwill is personal to the owner or employee and to what extent it is enterprise goodwill and therefore divisible property.

Yoon v. Yoon, 711 N.E.2d 1265, 1269-70 (Ind. 1999). “If a party wishes to exclude personal goodwill from a business’s valuation in a dissolution proceeding, they must submit evidence of its existence and value to the trial court by ensuring that their chosen expert provides proof of such existence and value.” Balicki, 837 N.E.2d at 538.