Three Essential Steps
Divorce is an emotionally challenging event, and when a family business is involved, the stakes are even higher. While many believe that a prenuptial agreement is the only way to protect a family business in divorce proceedings, there are several other strategies that can be put in place to safeguard the business and, importantly, ensure its value is preserved for both parties. In many cases, the business itself is a core asset that, if damaged, can negatively impact both spouses, limiting their financial security and affecting future generations.
Below, we outline three effective strategies to protect your family business beyond a prenuptial agreement. These steps can help ensure that, regardless of personal changes, the business remains resilient and continues to support both parties through its success.
1. Create a Family Business Governance Structure
Establishing a formal governance structure, such as a family charter or shareholders’ agreement, is a proactive measure that protects the business from the potential upheaval of a divorce. These governance frameworks set clear expectations for ownership, voting rights, and decision-making, ensuring that family members maintain a defined role in the business. Importantly, these agreements can also specify that non-family members or ex-spouses do not automatically gain control or influence over the business in the event of a divorce.
For example, a shareholder agreement can outline buy-sell provisions, allowing the family or remaining owners to purchase shares from an exiting spouse. This framework helps secure control of the business within the family while offering the exiting spouse fair compensation. By establishing governance measures early, you’re building a protective layer around the business that keeps its stability and ownership intact, regardless of personal circumstances.
2. Structure Business Assets for Resilience
Beyond personal agreements, protecting the financial and operational integrity of the business is essential. Structuring the business with asset protection strategies—such as setting up holding companies or trusts—adds a layer of resilience. By placing certain assets or intellectual property within a trust or separate entity, you can shield the business’s core assets from being divided or liquidated as part of a divorce settlement.
These structures help separate business finances from personal ones, making it more challenging for external claims or personal settlements to impact the business directly. For example, a family trust can protect specific assets (like real estate or valuable IP) from division, ensuring that these remain part of the business’s value and support the ongoing success of the company for all parties involved.
3. Set Up Key-Person and Continuity Insurance Policies
In the case of divorce, financial strain is a common side effect, and the business can often feel the pinch. Ensuring the business’s resilience during and after divorce proceedings can be supported through strategic insurance coverage. Key-person insurance and continuity insurance can provide liquidity that protects the business from financial disruption, such as if a divorce settlement creates an urgent need for cash flow.
Key-person insurance helps cover any immediate financial gaps or losses if a leading family member is forced to leave the business. Continuity insurance, on the other hand, offers a broader safety net, covering the business’s operational costs and enabling it to sustain its trajectory without needing to sell assets or rely on rapid financing. Both types of policies provide the financial flexibility to handle cash flow issues, maintain employee morale, and ensure business continuity, regardless of personal disruptions.
Why Proactive Protection Matters
Too often, the damage a divorce can inflict on a family business impacts both parties negatively. By taking steps to protect the business, each spouse can maintain the business’s value, creating a financial advantage for both parties and ensuring stability for the family’s future generations. Safeguarding the family business is not just about protecting one party’s interests—it’s about preserving a shared asset that both parties may rely on for income, growth, and legacy. At Cuthberts, we specialize in helping family businesses put comprehensive protections in place for times of personal change. Contact us [hyperlink to context page] to learn more about the measures available to safeguard your business and ensure its strength, whatever the future holds.