Just like marriages, business partnerships do fail. In some cases, it is a slow process where the owners decide it isn’t working out, but can end the partnership amicably. In other cases, it ends in flames of passion over the direction of the business – sometimes with fists and many times in court. However, just like with marriage, there are some things small business owners can do to help protect the business should their relationships with each other fail.
Member agreements, shareholder agreements, and partnership agreements can be written to lay out what will happen in a dispute. As crystal balls typically don’t work, all disputes can’t be planned for. However, a general layout of what you will do if the partnership fails can be put into place to lay the framework for a structured buyout, termination of services, and changes in ownership company.
Buy sell agreements can be put into place to ensure that there is a clear path of ownership for shares of owners that die or become disabled and that there is payment available to cover that path. For instance, if two out of three owners work in the company, it may be determined that if those individuals die, the company will want to buy them out. However, if a third owner is only an investor, it may not matter how owns his shares when he dies. Typically such agreements are funded through insurance policies, the parties in a partnership can determine how the sales price will be set and the company will pay for the policies.
Preparing for a divorce in a business is much like that in a marriage. You can’t prepare for everything that will happen while you are in business together. You cannot prepare for if the value of the business will go up or down. You need to make sure you have regular meetings with your co-owners and that you have some level of comfort with them before you go into business. In addition, you always want to make sure that on some level, you understand that partnerships can fail and that you have prepared for the multiple outcomes that can happen.
If you have any questions about going into business with other owners, please call me, Elizabeth Lewis, your Denver small business lawyer, at 720-258-6647.