It is always exciting when you start a new business. There are so many things to do from writing a business plan, securing funding, finding the right location and hiring your first employee.
But if you have a business partner, you both should think about how you need to protect yourself and the business if someone wants out of the business. Most partners don’t think about “the end of the relationship” when they are starting up. Yet, it is critical to do so from the beginning.
Business partnerships are a lot like marriages – some are made in heaven and some you can’t get out of fast enough. However, you never truly know until you go into business which one will apply to you. Also, some partnerships come to an end because of divorce, death or health issues versus just their inability to get along with each other.
So, it’s important to understand the rules of “disengagement” if someone wants to leave. You need to have a buy-sell agreement that all partners have agreed to before you put the first dime into the business.
Here are several key elements that need to be addressed in your buy-sell agreement.
How will you determine the value of the business? This typically involves appraisals and the methodology that will be used. Several methods are used for valuation, and you would want to use the methodology that is relevant to your industry.
How will you fund the “buy-sell”? This is an issue that if not addressed can kill the business and often does. When a business partner dies and the buy-sell agreement isn’t funded by insurance, many times the business can’t survive the cash payment because of the estate of the partner.
No matter what circumstances force the partners’ sale of their part or shares of the company, the buy-sell should address how the transaction will be funded so the cash flow of the company is such that the business can remain viable if that is the intent of the remaining partner(s).
What happens if a partner gets a divorce? If you don’t make provisions that are signed by a spouse so that they too have to abide by the buy-sell agreement, you may be forced to do business with someone’s ex-spouse.
This is an often overlooked element for partners because they are thinking “happily ever after” on both fronts. If you are married or get married after the business is up and running, you should make sure that the spouse is covered in the buy-sell agreement.
What happens when you have a serious deadlock? Let’s say that equal partners just can’t see eye-to-eye on a major issue. Your buy-sell agreement should address this possible scenario. You can have a required action such as the issue goes to an arbitrator.
I have even heard of the “put an offer on the table” method where when two partners hit a deadlock, one partner can put a price for the business on the table and the other partner can either buy or sell at that price. Again, it’s important to have some agreed upon way to handle a deadlock situation.
What happens if a partner becomes disabled? Many partners have thought of what happens when a partner dies. Very few think about the possibility of disability.
This is another issue that should be addressed before emotions become a part of the equation. How long will the partner draw a paycheck? What happens when you have to hire someone to cover their duties?
You and your partner(s) will need the help of an attorney to put a buy-sell agreement together. Just remember that business circumstances can change. So you should review this document every couple of years to see if you need to revise the agreement to reflect changes in your company.
If you have a partner(s) and don’t have a buy-sell agreement, then get one. Don’t wait because you don’t know when you will need it. This document can save you, your partner and family members a lot of heartache as well as attorney fees. Remember, the best way to avoid a misunderstanding is to have it in writing, signed and witnessed.
Lynn Vos is area director of the University of Georgia’s Small Business Development Center. Contact her at 912-651-3200.