Most of the time when people think of that old tune, they are thinking about personal breakups – divorces, separations, etc. Although our office now handles those matters too (if you haven’t heard, go check out our new partner Rachel Osband) we often handle “business breakups” and those can be every bit as dramatic and stressful as the personal type. Having witnessed a large number of these splits, we’ve put our heads together and come up with a list of things you can do BEFORE the breakup to ensure that your business split is as amicable as possible.
- Make it clear when (and what) the beginning is. If you have an existing company and are thinking about bringing someone in, make it VERY clear to them how that will occur. Detail what they will be expected to agree to in a signed document and when things will be “official.” It is far too easy to create a default partnership or an accidental oral agreement for you to be anything but CRYSTAL clear about when a potential partner will be a part of the company and what the relationship is prior to that. If there is no company yet on either side, set one up as soon as possible. Without some sort of entity you may be considered a default partnership, which allows for NO protection between your personal and business assets.
- Be realistic. If your business is just starting out and has few assets, having to buy out an owner in a lump sum could bring the entire thing to an end. Be sure that any requirements in your company documents (whether they deal with hiring someone to set a value for the company or paying out an amount due to an owner leaving) can be met with the assets you have RIGHT NOW. Don’t assume that you’ll have the ability to make the payments “when something happens.”
- Anticipate the end and plan for it. Many people cite “not wanting to talk about awful things” or fear of “jinxing it” as reasons to put off many important legal decisions, including business breakup planning. However, talking about how you can take apart your business, who will own what, and what will be expected from each person if the company is no longer (or continues without one of the owners) may be the best way to make sure it survives. Knowing you can have an initial difficult conversation with a potential business partner is a great indicator of whether you may be able to succesfully run a company together.
- An ounce of prevention…. a pound of cure. We often tell clients that the best thing that can occur is we draft a partnership, member control or buy-sell agreement and they never actually need it. However, as with most things, it’s far better to have the documents in place and not need them than to need them and not have them. Starting a business or bringing in a partner can be an extremely exciting and fast-moving time, and with the right person can take your business much further than you alone. But resist the urge to “deal with details later” and put some well thought-out agreements in place. Trust that Future You will definitely thank Past You if you ever need to use them!