Co-owning a business with someone is, in many ways, like a marriage. Like marriage, a successful co-ownership relationship depends on trust and mutual respect. And like marriage, business relationships tend to have their up and downs. They start off with giddy optimism, but inevitably hit rough patches that test the dedication and loyalty of the participants to one another. And if co-owning a business is like marriage, then buy-sell agreements are the equivalent of the prenuptial agreement, specifying how the business’s assets will be distributed if a break up occurs.
Where the marriage/co-owned business analogy breaks down is that unlike people entering a marriage, most people entering a business relationship probably anticipate wanting to be able to exit it some day. That is why, unlike prenuptial agreements, which most people understandably choose not to broach with their new partner, the need for buy-sell agreements should not be controversial. And yet, for a variety of reasons, buy-sell agreements occasionally get left out of the business formation documents. Sometimes because people don’t know. Sometimes because they forget. Sometimes because, even though we are talking about a business relationship, there is an underlying personal relationship that makes hashing out the details of a break up uncomfortable, especially when the participants are in the giddy, optimistic phase.
Omitting buy-sell agreements can leave people stranded
The consequences of failing to include a buy-sell agreement in your business formation papers can be disastrous. Another area where the analogy with marriage breaks down is that, unlike a marriage, if your business relationship deteriorates before you have had a chance to agree on an exit plan with your co-owners, you might be stranded in an increasingly combative relationship for an extended period of time. If your business is a small, closely held one, you cannot count on there being a market for your ownership position, and you may be forbidden from selling your position anyway. Moreover, buy-sell agreements are not just for bad break ups. They also specify what happens to an owner’s share if he or she dies or retires.
Good buy-sell agreements make good business partners
Although it can be uncomfortable to talk with your business partner about the end of your relationship, especially while you’re still at the beginning, and even more especially if your business partner is a close friend or family member, knowing that there is a fair, orderly exit plan available will likely take some of the edge off when disputes do arise with your co-owners. Fall outs happen. Look back at the histories of even the world’s most successful companies and you will inevitably find someone who feels he got screwed somewhere along the way.
If you are in the process of forming a business with others, or already have a business that doesn’t have a buy-sell agreement in place, feel free to contact me to discuss these issues further. Buy-sell agreements come in many different varieties and can raise a number of different issues.