Before going into business with a partner, make sure a lawyer drafts up a buy-sell agreement that covers what will happen in the event of death, disability, “disillusionment” and the transfer of the interest in the business at retirement.
Just because you go into partnership with another person, with all of the best intentions in the world, doesn’t mean that at some point in time you may not have a falling out over – well, over any one of a number of things that happen when trying to run a company and stay friends and partners. No matter whether the form is a partnership, limited liability company or corporation, making sure the principals have properly prepared buy-sell arrangements is critical.
Think that will never happen? Think again. It’s a far too common occurrence and many people have made the mistake of not dealing with this eventuality in a buy-sell agreement, and have lived to regret that decision. The essential parts of this type of contract must be outlined in detail by your corporate lawyer and include an evaluation method for the business and how to pay out in the event of the big four – death, disability, disillusionment and transfer of the interest in the business on retirement.
If you’re having trouble imagining what kinds of situations would make you have a dust up with your business partner, speak to your lawyer. Most corporate lawyers have seen it all and been there and done that. That’s what they’re paid for, to craft a buy-sell agreement that will withstand any of the above-mentioned eventualities.
The importance of having a buy-sell agreement in place cannot be underestimated. It is a crucial document that will ultimately ensure the continuation of your business and allow your family a return on a lifetime of your hard work. Caution: this will only happen if there is money behind this agreement. No cash can end up in a major disaster, as the agreement may obligate more than the signing parties. It may obligate family, heirs and partners. Without cash, no one will be able to carry on the empire or have any security.
These issues need to be discussed in great detail prior to signing anything and they need to be resolved to the satisfaction of both partners. If something does happen and one party wants to pack it in because they fell out of “love” with their partner, they need to be covered for this possibility.
Of course, before getting that far into drafting an agreement, the crucial question of where will the money come from to fund it needs to be asked, along with how much will you need and whether or not, realistically, you are able to afford it. Remember, that without money in the background, a buy-sell agreement is potentially worthless. A worthless contract without money backing may have serious consequences; just ask your lawyer to fill you in.
In the meantime, while you are waiting to have that buy-sell agreement drafted, make a list of important questions to ask your lawyer such as “How much money in before tax dollars do we need?” “Where does the money come from?” “How much money in total is required to live up to the terms of the agreement?” Make the list a substantial one, because these kinds of agreements need to be discussed in great detail. Your lawyer knows this and will walk you through the sticky parts.