Did you know that if you do not have an agreement with your business partner, your business partner’s spouse could become your partner in the event of your partner’s death, disability or divorce?
When starting a new business venture with a friend or relative, it can be easy to get caught up in the excitement of starting your own enterprise. No matter how exciting or overwhelming, it is important not to overlook small details that can have a big impact later on. Creating a partnership agreement while in the early stages of business can help you prepare for the unexpected changes you will face later on even if the business is a corporation, LLC or partnership.
A partnership, stockholders or operating agreement is a written document that outlines the duties and responsibilities of each partner. The agreement should also spell out who can make business decisions and how the decisions will be made.
From the start
While not every situation can be thought out in advance, a partnership agreement between all parties will allow you to document how you will handle changes to the business. It will function as a reference guide during tumultuous periods. When you are starting the business everyone is on board and committed to the success, but later on personal interests can compete with business interests. Crafting the agreement early on will ensure that the agreement is designed to help the business succeed rather than promote the success of individual partners.
Every partnership agreement should contain a buy-sell agreement. It may be difficult to imagine wanting to leave the business or end the partnership, but a life change might make the decision necessary. For instance, if a partner divorces, the former spouse could seek ownership interests in the business. A similar shift in business ownership could happen if a partner suddenly dies or becomes disabled and her spouse becomes an owner by default. A buy-sell agreement can address and prevent these changes.
A buy sell agreement should include a valuation clause addressing how you will have the value of the business assessed. It should also outline possible triggers for a sale or buyout, such as sudden life events or a breakdown between the partners. Lastly, the agreement should include ground rules for who can and cannot purchase the business.
If the idea of having a discussion about the future of your business and the potential dissolution of your partnership seems awkward, it can be. However, having these discussions now while all parties are committed to the success of the business is much easier than at a later date when the partnership has soured. Having a strong partnership agreement in place allows your business to evolve as the needs of the business and partners change.