Got a Business? Get a Prenup

If you don’t work out how to handle your assets ahead of time, a divorce could devastate your company.

By: Nina Kaufman | 01/02/2009

Business owners look forward to “prenups”–whether with a spouse or a business partner–with about as much eagerness as a rectal exam. Sure, it’s necessary, but it’s often unpleasant and something you’d rather skip. Some people do– avoiding the doctor for that reason.

But those exams can uncover serious health situations that, if left untreated, could wreak terrible damage. Same goes for not having a prenuptial agreement. If there’s a divorce and you haven’t worked out how to handle your assets, the damage inflicted on your company could be devastating.

What, Exactly, Is a “Prenup”?
Essentially, a prenuptial agreement (“prenup”) is a contract between prospective spouses that addresses how the financial aspects between them will be handled in the event of a divorce. All 50 states recognize prenuptial agreements. Some states honor “domestic partnership agreements” between unmarried people that cover similar issues. Your company will be among the most important financial assets you’ll want to address.

Why Should You Care?
The statistics aren’t encouraging: Almost half of all marriages end in divorce, and approximately 40 percent of marriages include a spouse who has been married before. This can make for complicated financial issues. Discussing this decidedly unromantic topic with your intended can feel like pouring a bucket of cold water over your wedding plans, or raise concerns about the level of trust or commitment between the partners. In the long run, to paraphrase Friedrich Nietzsche, what doesn’t kill you makes you stronger as a couple. Discussing the terms of a prenup can open up sound pathways for communication about family finances that will serve you well throughout your life together. And in the event of a divorce, it eliminates the time-consuming and costly bickering over assets and money.

Ownership of a business (or the increase in the company’s fortunes since the marriage) is considered an asset acquired during the marriage (“marital property”) unless there’s evidence to the contrary. As a result, absent a prenup, state laws will require that marital property be divided equally, or at least “equitably.” Depending on your state, your entrepreneurial dreams could be cut in half should you divorce.

How Does a Prenup Protect My Business?
Contested divorces rarely bring out the best in people. Some will be ruthless, just to spite the soon-to-be ex-spouse. It’s not unheard of for a spouse to fraudulently claim that he or she has a stake in the other spouse’s business, which could be hard to disprove if you’ve not kept appropriate records. A prenup offers protection against predatory challenges in the following ways:

• It can define your company as an asset acquired before marriage.
• It can provide for who controls the company post-divorce.
• It identifies who owns the stock in the company.
• It can set out a fair method for valuing the business or its stock at the time of divorce (which could refer back to the formula contained in the company’s ownership agreement).
• It can address all present and future property, assets and income, both during the marriage and in the event of divorce.

Like an ideal relationship, a successful prenup has the following qualities:

• It’s fair.
• There’s full disclosure of financial (and other) issues.
• The parties entered into it freely (e.g., you’re not forcing your intended to sign while you’re on your way down the aisle).

It’s also vital that each partner gets his or her own attorney. Yes, it costs money, but think of it as an insurance policy. Isn’t your business worth it? The best that can happen is that you’ll live in married harmony and never need to rely on it. The worst is that you’ll be living in married hell and won’t have a prenup to protect you.

Nina Kaufman has a New York City-based boutique law practice that focuses on women-owned businesses, and is the president of Wise Counsel Press LLC, which produces legal information products for entrepreneurs. She also writes the Making It Legal blog.

How Honda Used An Unlikely Partner to Conquer India

“It is more advantageous to conquer nearby enemies, because of geographical reasons, than those far away. So ally yourself temporarily with your distant enemies in spite of political differences.”

—From The Thirty-Six Stratagems

With the domestic car companies receiving a bailout from Washington, I thought it would be a good time to review a motor company that uses innovation to stay competitive and open up new business fronts – Honda.

Everyone likes to draw clear lines between supporters and competitors, but it is becoming difficult to do so. This stratagem shows that by selecting the right supporters and targeting the right competitors, one can play one off the other and become more powerful.

Honda Befriends a Bicycle Company

Looking from the sidewalk of any major western city into the street, you might assume that the largest motorcycle manufacturer in the world must be Suzuki or Kawasaki. However, you would be wrong. The world’s largest motorcycle manufacturer is not BMW, Ducati, or even Harley-Davidson. Almost no one in the United States or Europe has heard of the world’s largest manufacturer of two-wheel vehicles, even though it produces more than 3 million bikes a year, including the world’s most popular motorcycle, the Splendor. The largest two-wheel motor vehicle manufacturer in the world is India’s Hero Honda. It owes its success to an unlikely pairing of two distant enemies: a motor company and a bicycle distributor.

Honda had been waiting for years to sell motorcycles in India because the country’s motorcycle business is extremely profitable. It produces just 15 percent of the company’s revenue yet generates 50 percent of the firm’s operating profit. India, with nearly one billion people, in which 70 percent of motor vehicles are two-wheelers, promised an extraordinary opportunity to expand this profitable business. However, Indian government protection forbade foreign firms from the market.

In the early 1980s, the rules changed. India’s domestic firms, which were enjoying a near-monopoly, could not meet demand. The Indian government responded by allowing foreign companies to enter India through minority joint ventures with local Indian companies. Honda finally had its chance.

To begin selling in India, Honda had to first choose a business partner. It had many well-suited partners to choose from as several domestic motor-scooter companies had established themselves under India’s protective laws. The logical choice would be a company with experience building motors, assembling motorcycles or scooters, and a network established to sell them. Honda could easily plug its brand and motor design expertise into such a partner.

However, one of the Indian companies that courted Honda was a family-owned bicycle firm called Hero. Founded by two brothers in the 1950s, Hero had built a network of independent bicycle dealers and had established one of India’s leading bicycle brands.

While Hero did not initially hit the top of Honda’s potential partner list, Honda was intrigued by two factors. First, Hero had already begun adopting “just in time” (JIT) inventory practices. Pioneered by Honda and other Japanese manufacturers, this practice of minimizing inventory by ensuring parts are only delivered at the time needed was beginning to revolutionize the designs of manufacturing floors throughout the developed world. Honda executives were surprised to see an Indian bicycle company embracing such an innovative practice so early. This signaled that Hero and Honda shared a culture of operating discipline.

Second, through forty years of selling bicycles, Hero had blanketed India with a large network of independent bicycle dealers. It had organized hundreds of suppliers who delivered just in time. By partnering with Hero, Honda could potentially convert bicycle dealers into motorcycle dealers and could source materials through Hero’s vast distributor network.

While Honda’s competition partnered primarily with Indian motor companies to create TVS Suzuki, Bajaj Kawasaki, and other joint ventures, Honda aligned with a bicycle company to create Hero Honda.

Hero Honda launched several innovations in the coming years that established its dominance. It was the first to introduce a four-stroke engine into India. This technology, for which Honda is famous, dramatically increases fuel efficiency and reduces maintenance costs, making Hero’s motorcycles attractive options for price-sensitive Indian riders.

While its competition preferred to run their own dealerships, Hero Honda used Hero’s experience managing independent dealers to establish a powerful network of 5,000 outlets. On the back end, Hero Honda coordinates over 300 suppliers who supply parts and materials just in time.

The innovative strategies needed to build a bicycle business proved an ideal complement to Honda’s motor design and manufacturing capabilities. Had the company partnered with a nearby or domestic enemy, it might have remained in a crowded pack of good motorcycle companies including Suzuki and Yamaha. Instead, by partnering with a distant enemy, Honda became outstanding. It helped create the largest motorcycle company in the world.

We increasingly find allies among competitors, and competitors among seemingly unrelated companies. This creates opportunities. We can look for—even create—“distant” enemies with whom to achieve common goals, such as attacking “nearby” enemies. By avoiding knee-jerk reactions to friend and foe, new opportunities emerge. Ask yourself these questions to see if you can find a new ally or a new enemy.

1. What market do we want to enter and who already seemingly “owns” that market?

2. Is there an out-of-state or overseas company that can complement our future endeavors?

3. Is there a local competitor that we can buy out or overtake?

4. Is there something our local competitor is doing that we can do better?