Australia 2019: 113,815 marriages registered; 49,116 divorces granted. We’re marrying later (32 for males, 30 for females), and more couples are living together for several years before marrying. Consequently, marriages are generally lasting longer, and divorce rates are trending downwards from their peak in the 1970s and 1980s (Australian Bureau of Statistics, 2019).
The bottom line is that 40% to 50% of first marriages end in divorce or permanent separation, and about 60% to 65% of second marriages fail. If family business owners have more than one marriageable child, there’s a fair chance there will be a divorce in the family that could put the family business at risk.
Divorce has become more common in the last 50 years due to: (a) greater social acceptance and (b) greater accessibility to resources – the progressive institutionalisation of Family Law has turned the process into a high-volume business process. Nevertheless, divorce seems to be every bit as stressful, expensive and damaging, as it always has been.
Fear of relationship failure in the next generation has long been claimed as a justification for protecting personal and family assets from attack. In a family business context, this often translates into a refusal to transfer ownership (equity) to successors before parents die.
The resulting lack of holding any tangible ownership interest can create enormous insecurity amongst succeeding generations, as in: what if Dad dies and Mum re-marries? This can seriously disrupt succession processes, and thereby cast serious doubt on future business continuity.
Here’s the irony: being in a family business can place extra strains on a marriage. Parents continue to hold influence over their adult children – as their bosses – in ways that simply wouldn’t arise in “normal” employment. Inappropriate cheque book (credit card?) diplomacy, and financial carrots and sticks (“one day this could all be yours”), can generate enormous resentment amongst married-in spouses and partners, who find themselves in competition, or opposition, to their parents-in-law, as they try to secure their own family’s future by “encouraging” their partners to push their parents to hand over a stake in the ownership of the business.
Regrettably, their nearest and dearest is reduced to being the meat in the sandwich between their spouse and their parents / bosses. If things get bad, it’s game on!
Solution
Risk cannot be entirely eliminated, but it can be managed tightly enough to be acceptable:
- Assets, including businesses, can be owned by trusts in which nobody has defined interests. Instead, they just have discretionary, beneficial entitlements.
Provided the trust is: (a) properly established; (b) set up in good time and, (c) correctly operated, it should provide effective asset protection.
However, a trust, in itself, is not enough. It needs to be part of a system of protection, otherwise there’s a danger the Family Court will drive straight through it to the reality that lies behind.
- The family can enshrine its own rules of engagement, and protections, in a Family Constitution. If the Constitution requires all couples that are in anyway engaged with the family business to have formal BFAs (Binding Financial Agreements) in place, the BFA becomes a more understandable, and much less personal, imposition.
BFAs can be entered into as pre or post-nuptial agreements. The important thing is for them to appear fair and reasonable, so if a relationship breaks down, there’s reasonable provision made, under all the circumstances, for the departing spouse, in lieu of their having any claims against the family business.
- Regular family meetings (eg: annual Family Forums) should be used to reconfirm everyone’s acceptance of the Family Constitution. If things go downhill, a reasonably current confirmation of understanding and willingness to be bound by a whole-of-family agreement will be far more effective (as “best available evidence”) than an agreement that been lying in a drawer somewhere for the past 10 years, even if the Constitution is not a binding contract, in a formal legal sense.