A Prenup for Your Business?
Who you choose to be in business with, as a co-owner, is almost as significant as who you marry. Business owners spend as much time with their business partners as they do with their spouses, or more. A dysfunctional business relationship can have severe economic consequences for the owners, as well as the employees.
Just as with marriage, business partnerships of any kind (as members of a limited liability company, shareholders in a corporation, or partners) should be entered into with caution, and after really getting to know each other. “Pre-marital” counseling for business partners can also help to flesh out potential problem areas and disagreements, and decide in advance things like who will make which decisions, how you will communicate, how you will split profits, etc.
What about a prenup? We could have a spirited discussion about whether prenuptial agreements are wise and advisable in an actual marriage, but I would argue that they are always a good idea in a business marriage, in the form of a buy-sell agreement.
A well drafted buy-sell agreement will accomplish one main goal, through various mechanisms. That one goal is to make sure you are in business with whom you want. The mechanisms (in parenthesis below) apply under various circumstances: (1) the death, divorce, or bankruptcy of a partner (automatic sale of the interests to the company or the other partner), (2) attempts to sell to a third party (right of first refusal), and (3) the partners not getting along any more (a “put/call” option, or forced sale provision).
On nearly a weekly basis I counsel clients on disputes with business partners (which we all call a "business divorce"). What started as a wonderful relationship has cooled, now very often to the point of anger and contention, or pervasive silence. One very common misconception in these cases is that they can just “buy out” the other partner if the problems cannot be solved. If there is no buy-sell agreement allowing for it, a buy-out is not guaranteed but completely dependent on the other partner’s agreement. For this reason alone, buy-sell agreements, the “prenup” of the business world, should be mandatory for all business owners.