The decision to start a business is exciting. You have a great new strategy, idea, or product, and you’re dreaming of ways to make it a reality. At this stage, many entrepreneurs make the mistake of only focusing on their dreams of success and envisioning the good times in the future.
However, careful and smart businesspeople will also consider potential challenges and have frank discussions with their business partners about how to address them ahead of time, whether they are forming a corporation or a limited liability company. Most of the questions about managing the rough periods are the same across all types of businesses. The biggest issue is control.
Agreeing on Control and Making Decisions as a Team
Many business decisions are made based on ownership percentage, but the subset of decisions must be unanimous and should be negotiated. Important decisions that fall under this umbrella include adding new members or shareholders to the company or when the company should cease doing business. But as you may have already observed, this creates potential decision-making concerns. What if two partners each own exactly half of the business? How do you resolve an impasse?
One possible solution is that each business partner has control in a specific area. In some cases, entering arbitration or dispute resolution may be appropriate. If moving forward with joint ownership proves untenable, there is also an option called a Push/Pull provision, where an owner makes an offer to buy out the other owner. The partner receiving the offer can either accept it or buy out the offering owner for the same terms. The underlying intent is always to ensure fairness to both owners and the business partnership as a whole.
Shaking Out a Business Partner Shake-Up
Another area to consider is addressing a situation where an owner effectively loses control over their ownership percentage. The most prevalent reasons for this are when an owner gets divorced, goes through bankruptcy, or passes away.
Many LLC or shareholder agreements have provisions that allow the company to step into these situations and buy out the owner experiencing difficulty. A well-written agreement will specify how the value of these owners’ interest should be calculated and include company-friendly payment terms to manage cash flow.
For example, what if an owner wishes to sell their interest in the business? If you address the possibility ahead of time, the other owner(s) may want a right of first refusal of the interests for sale.
You should also consider the situation where a majority owner wants to sell their interest. The majority may want to force the minority owners to sell along with him to maximize the value of the business to a potential buyer. These are called “Drag-Along rights.”
Conversely, the minority owners may want a potential buyer to purchase their interest and the majority share. These are called “Tag-Along rights.” However a partnership may evolve or dissolve, the most important aspect of a solid business partnership is that these eventual possibilities be discussed ahead of time and included in the written ownership documents.
Good Business Counsel Can Cover All Your Bases
The above examples are just a few potential outcomes or hurdles that you may encounter during joint ownership of a company, but hopefully, they offer useful insight into why broad and specific agreements must be made before entering into a partnership.
Spending time with counsel at this stage and reviewing your rights and responsibilities as a business partner may help alleviate potentially contentious issues and allow you to focus on growing the value of your business.
Richards Rodriguez & Skeith’s experienced business law attorneys are adept at expert counseling and advising throughout all stages of a business and can help you protect yourself and your interests. Contact us today to discuss all your business-related needs!