The Importance of Agreements Between Business Owners

So you and a friend have taken that leap and decided to set up a business together.

Great! And Congratulations!

But the lawyer in me has to ask “Do you have your exit plan in place?”

I see the look of shock on your face.  It could only be more genuine if I slapped you.

“Weren’t you listening?  We just started the business.  I’m working with my best friend and we’re going to make piles of cash!”

I heard you.  And I’m genuinely happy for you.  I HOPE you succeed.  No attorney wants his clients to fail.

BUT…

I can’t tell you how many times I have witnessed a business start with all the hope and potential you’d expect in a new venture, only to see the owners get in knockdown dragouts which end up destroying the business when conflicts come.  The fact is that you will probably need an agreement between the owners at some point anyway, either for tax purposes, or for the ability to obtain loans from banks, or for some other  legitimate business purpose.  However, the way I talk to clients about it is to tell them that this is their opportunity to “pre-negotiate” a divorce, and the best time to do that, the time when everyone is most likely to be fair with each other, rather than consumed with emotions that often cause people to make  bad decisions, is when everyone is happy and excited.

I know, some you might think that this would be the last thing that business owners would want to be thinking about at a time like this, but putting aside issues of fairness, it is also when people are going to be the most objective when considering issues such as what happens if an owner becomes disabled, or dies.  Do you want to be a partner with the surviving spouse?  Do you want to be a partner with the children or other heirs?  If you don’t, how do you want the estate fairly compensated for this? How will you value that ownership interest?  Do you want restrictions on the transfer of ownership?  What happens if an owner transfers their ownership interest WITHOUT consulting the other owners or complying with transfer restrictions?  What if an owner simply decides that they want out?

Being able to agree ahead of time to the answers  to these and a host of other questions is important, because if you don’t agree, then you get to get attorneys and courts involved, and the issues will be resolved, but it will take a lot of time, money, irritation, money, effort, and money, and by the time you’re done, the business may not survive, and you might have some significant legal costs as well.

The good news is that you have a choice, and you can make decisions right now that will make that day considerably easier to deal with.  It may even make it possible to keep the friendship, let alone the business, and there isn’t really a price that can be put on this.

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Filed under Business Law, Contracts and Agreements

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