James David Williams
Business Origination Documents Are a Prenuptial Agreement
Starting a business with partners is like entering into a marriage. At the beginning, there is a honeymoon period when everyone projects prosperity and overcoming obstacles. The governing documents establish how the business will be managed and operations commence. Too often, hard discussions are pushed back—the thinking is that since everything is going to work according to plan, there is no need to address what will happen should things go wrong (and those conversations are uncomfortable anyway). Then things don’t go according to plan and the partnership becomes untenable. In the ensuing business divorce, things get messy and large sums are spent fighting over custody of the business and its assets with no one left satisfied.
Many business partnerships will splinter. That is just the reality. This does not mean that you shouldn’t form a new partnership, but it does mean that you should go into the new venture with your eyes wide open. With more sober planning at the outset, it is possible to alleviate most of the pain of a business divorce. Treat the operating agreement or the shareholder agreement as if it were a prenuptial agreement that you are signing before entering a marriage. These governing documents will rarely be required while operations are successful and the business is thriving, but when things turn sour they take on monumental importance. Prepare for the worst even as you plan for the best for your new business.
With this shifted attitude, you will see provisions in the governing documents in a more realistic manner. As an example, what happens if one of the partners wishes to leave the business? This scenario is likely to arise at some point, but you may not realize this when the business is founded. The question raises all manner of thorny issues: How should the company be valued? Who should perform the valuation? Who should be allowed to purchase the ownership interests being sold? Should there be the opportunity for multiple owners to sell at the same time? Each of these questions has several potential answers and blanket advice is impossible to give. What is not a good answer to these questions is some version of “we’ll get to that later.”
If these types of questions are answered at the outset, then there is at least a process specified for going through a business divorce if necessary. If you need guidance forming your new business with an eye towards solving problems in advance, email us at firstname.lastname@example.org and we will be glad to work with you as you invest in the longevity of your business’s success.