Often when people come to our office excited about the prospect of a new business relationship, they are like a young newlywed couple, excited by all of the possibilities that the future holds. We walk through potential issues or concerns in the relationship and discuss rules to deal with future disagreements and the termination of the business relationship. Because business owners tend to be optimistic by nature, many are sure that their situation, partner, etc. is different, and that they will be able to work it out if/when that time comes. Unfortunately, that is often not the case.
Benjamin Franklin said: ““an ounce of prevention is worth a pound of cure” and habit number 2 from Stephen Covey’s book, The 7 Habits of Highly Effective People, is “begin with the end in mind.” This is great advice to owners starting a business. Whether it is a partnership, LLC, corporation, or otherwise, one of the most important decisions that an ownership group will make on the way into the business, but one that generally does not receive much attention, is how to exit the relationship. Engaging in thoughtful planning while everyone is still getting along can save the owners and the company time, money, relationships, and peace of mind down the road.
Have the answers to these questions been formally addressed and codified in your business organizational documents?
- Can an owner withdraw or resign as an owner?
- If so, can the owner demand compensation for his/her interest?
- Can an owner be compelled to sell his/her interest in the event of death, divorce, disability, bankruptcy or some other triggering event?
- If so, how will the owner be compensated?
- Can an owner be expelled?
- If so, on what grounds?
- If an owner is expelled, how are they compensated?
- What are the requirements to liquidate the company?
- Can one or more owners compel another owner to join them in selling their interest to a third party?
These and other similar questions are important to consider on the way into your business relationship or the consequences may be devastating on the way out.