Market Digest

Study shows most business owners failing to “divorce-proof” their companies

A bad marriage isn’t the only thing that ends with a divorce. Sometimes, a good business can go bust, too. While 580,000 new firms opened in 2004, about 10 percent of existing firms closed. And with the national divorce rate at about 3.5 for every 1,000 people, how many of those closures resulted from divorce? How many of the new firms are at risk?

Despite that risk, most business owners — 60 percent — have no plan in place to “divorce-proof” their companies, according to Massachusetts Mutual Life Insurance Company’s (MassMutual) research study, FamilyPreneurship: What Every Entrepreneur Should Know before Starting a Business with a Family Member, a two-part study conducted by Harris Interactive in 2009 among six focus groups of small business partners and online among 518 business owners.

“Everybody likes to think that marriage is forever, but unfortunately it often isn’t. Even if they think divorce will never happen to them, business owners owe it to themselves, their families and their employees to put a plan in place, because all of them are depending on the business for their livelihoods,” said Beth Wood, an assistance vice president of the Life Company Marketing division of MassMutual, and a former family business owner herself.

“If a company is owned by a couple, a divorce can paralyze the business and create divided allegiances among employees and customers,” said Wood. “It could also jeopardize a family’s wealth and the owners’ retirements,” she said. “Often, a divorce can force the owners to sell the business, with proceeds being divided by the parties involved.”

Even for owners whose spouses aren’t co-owners, there are still lots of risks. “When owners aren’t in business with their spouses, a divorce can still hurt the firm greatly, if an ex-spouse is awarded the business in a divorce settlement, “throwing ownership and decision-making into doubt, and distracting employees,” she added.

The survey shows that of those respondents who experienced a divorce, nearly half said the break-up had a negative impact on their businesses. Larger companies were more likely than smaller ones to have “divorce-proofing” plans either already in place or in the works.

There are a number of potential strategies that owners can use to reduce the likelihood that a divorce could hurt their businesses. A few of these include:

• Buy-sell agreements that can be triggered by certain events, such as a divorce.
• Prenuptial agreements.
• Postnuptial agreements.
• Trusts.

To put an effective plan in place, it’s important to work with a financial professional, such as a Certified Family Business Specialist, who knows how family dynamics affect businesses and is familiar with risk-management and wealth-preservation strategies.

Learn how MassMutual helps entrepreneurs meet their business needs; visit massmutual.com/smallbusiness. See real business owners tell how MassMutual helped them meet challenges and keep their businesses running at massmutual.com/customervoices/business.

Methodology

FamilyPreneurship is a two-part study of focus groups among small business partners, and an online survey. Six focus groups were conducted by Harris Interactive on January 29, 2009, among 6 separate pairs of family business owners. Participants met the following criteria: all own a business with a spouse, sibling, or immediate family member, have between 1 and 500 employees, have been in business for at least five years, and earn a total annual revenue of $1 million or more. The survey was conducted online within the United States by Harris Interactive on behalf of Massachusetts Mutual Life Insurance Company between March 6 -20, 2009, among 518 business owners, among which 330 are involved in a spousal business relationship and 250 are involved in a business relationship with a family member other than a spouse. Respondents met the following criteria: all U.S. residents, age 18 or older, have between 1 and 500 employees, have owned their business for at least five years, and have annual revenue of $500,000 or more. Results were not weighted. No estimates of theoretical sampling error can be calculated; a full methodology is available.

Source: MassMutual