10 things to consider if you're married and going into business together
Some marriages break down after a business relationship is introduced, but there are many that have not only survived but thrived and have become examples to follow.
Here are 10 things couples may want to consider before establishing a business relationship.
The list is not intended to be exhaustive, but serves as a guide.
Marital regime: which is best? An antenuptial contract without accrual can go a long way in creating legal harmony between the existing marriage and future business venture. This type of contract marriage basically requires that each spouse retains his or her own assets and liabilities.
In the event of death, the winding up of an estate under a contract marriage has better potential to capture the essence of the business relationship between married individuals. As an example, if the husband is a minority shareholder, then this distribution will be reflected in the winding up of his estate, such that the surviving spouse will inherit a portion from his share in the business.
Will: does each spouse need one? A will is basically an instruction to the Master of the High Court for an estate to be wound up in a specific way or in line with specific religious beliefs. Thus, each spouse should ideally ensure that they have their own will prepared and kept in a safe place.
Without a will, the mainstream legal system prevails and is at times at variance with your wishes. Therefore, even though a couple who enjoy a business relationship may have an appropriate marital regime that is consistent with, for example, their religious beliefs, in terms of patrimonial consequences, the share of the deceased spouse may be exposed to the risk of being wound up in terms of the South African legal system.
One example of variance between South African and Islamic law is that if the deceased is survived by parents and two sons. Without an Islamic will, and according to the laws of intestate succession, each son would receive half the estate while the parents would be excluded. However, under Islamic law, each parent would inherit one-sixth and the balance of two-thirds would devolve upon the two sons in equal proportion.
Capital contribution: does it have to be 50%? A partnership by its very nature caters for varied capital contributions. A couple may decide to contribute equally, or in any other ratio that suits them.
Clarifying and agreeing on this ratio informs the parties on the ratio of entitlement to profit, as well as the impact of exposure to loss.
Ownership: does it have to be in line with capital contribution? One partner may be willing to contribute a larger sum of capital, but is willing to take a lesser ownership ratio. A contribution of 60% may be made whereas only 40% of equity interest is desired by the partner. This can and does happen, and it therefore becomes imperative to agree on the ratio of ownership in the business.
An agreed ownership ratio also helps when there is a loss. If an ownership ratio of 60/40 is agreed between the parties, then losses are to be borne in the same ratio.
Labour contribution: is it equitable and fair? Although a couple may be in a business partnership, they may find that sharing the same workspace subjects their relationship outside of the business to undue pressure.
Or that one partner is in fixed employment and the other manages the business until it is viable for both to come in. Whatever the case, labour obligations are necessary to outline for purposes of maintaining fairness throughout the partnership.
Some businesses are more labour intensive than others. At the same time, a third-party manager comes at its own cost and implications for the overall well-being of the business.
Thus, distributing the hours equitably goes a long way in making sure that there is sufficient manpower to manage the business.
Withdrawals: does the dominant partner enjoy greater privilege? Effective cash-flow management is at the heart of the success of any business enterprise.
In the case of partnership between spouses, the importance of proper cash-flow management can never be over-emphasised. Thus, it becomes necessary to spell out if random withdrawals are permitted in the first place and if so, for what purpose.
As a minimum requirement, no withdrawals should be allowed without the consent of the other partner. In addition, record keeping of transactions should be accurate and up to date.
Profit and loss-sharing arrangement: has the downside been considered? Most budding entrepreneurs have plans for the growth of their business, and rightly so. But has the downside been considered? What if things don’t turn out as expected? Thus, while profit-distribution agreements are reached, there should be a commensurate amount of thought given to how losses will be shared.
Muslim couples who enjoy a business partnership such that one of them is a sleeping partner should take note that the profit of such a partner cannot exceed his or her capital contribution.
Termination: can the business be voluntarily terminated and how? A business venture can cease to exist in a number of ways. This could be due to the unforeseen death of a partner, being incapacitated beyond foreseeable recovery or even an unexpected divorce. It is therefore important to set out the terms of termination that apply in a given business relationship.
Examples of terms and conditions that parties may want to include are, inter alia, particular actions of the parties that trigger termination proceedings, who has the first right to buy the share of the leaving, deceased or incapacitated partner, and the manner of determining the value of an exiting partner’s share.
Duration: is the partnership to last indefinitely? Proximity of related parties often comes with barriers in the style and manner of communication. The closer two people are, the more challenging it becomes to raise sensitive topics for discussion and clarity.
In the scenario of a couple enjoying a business relationship, if anything happens to discomfort one partner, he or she may find it rather difficult to discuss. To manage such an inconvenient situation, having a set duration for the existence of a partnership may provide some respite.
When the deadline arrives, the discomforted partner may simply opt out of renewing the partnership.
Arbitration: should a mediator/arbitrator be identified and agreed on upfront? A business may fail through a disagreement with a business partner, let alone a spouse, on a crucial aspect of the business or could relate to interpreting the terms of the partnership agreement and their application.
When conflict arises, it is often difficult to identify a non-partisan individual or organisation to mediate between the parties. Any name suggested by one party at the time of conflict is dismissed by the other, often just for the sake of frustrating the process of resolving the issue at hand.
Therefore, identifying a suitable individual or organisation at the very outset, and having this cast in writing, has a greater tendency to ease the situation if conflict does arise.
Both partners need to keep the bigger picture in mind as they navigate the peaks and troughs of the business cycle, as well as the peaks and troughs of their marital relationship.
In striking the right balance lies the formula to a successful husband-wife business venture.
Muhammad Haffejee is consultant in economics and member of the finance desk of the Council of Muslim Theologians.