Why Uncomfortable Conversations Now Lead to Better Outcomes Down the Road
Congratulations! You and a friend or family member have decided to start a business. Now what? Before you set up shop, it’s important to talk through everything that could go wrong.
One of the most critical things that you can do at the outset of a business relationship is to outline your mutual expectations and determine how decisions will be made as you move forward with your venture, especially if you will own that business in partnership with someone else. In recent years, the number of “business divorces” has been increasing— most often due to situations in which both parties assumed they were on the same page at the beginning—and weren’t.
In any company—whether a limited liability company, a corporation or a partnership—there are three major areas that, if not addressed early, are cause for disputes down the road. The questions to ask at the outset are:
1. What is each party bringing to the business, in terms of money, assets, and time and what are the ongoing expectations?
2. What will happen if a major decision needs to be made and the owners do not agree?
3. What will happen if one party needs or wants to leave the business?
All of these issues can be mitigated with careful planning at the beginning of the venture.
When it comes to contributions to the business, parties should be clear about their expectations. Will both partners be responsible for infusing cash into the business if it runs short or will only one party be responsible for doing so? Are there any consequences if only one party contributes? What about the day-to-day running of the business? Are both parties expecting to work full time? If not, how will you determine whether each party is contributing his or her fair share of “sweat equity” to the business? Is one party bringing a critical asset to the table, such as a piece of real estate or major intellectual property? These are among the vital details that form the basis of a good business relationship.
Second, what happens if there is a decision to be made and the parties simply cannot come to an agreement? This is a particular issue for companies where two parties will own the business 50-50. It is critically important that a method for breaking any deadlock be discussed and agreed to before disputes arise, lest it mean the end of the business—or costly litigation. There are many methods to be considered and there is no “one size fits all” answer. For example, the parties may agree that one person’s decision will always control. Alternatively, if one party has specific expertise, their decision in that area will always win. Other times, a deadlocked decision can trigger a forced buyout of one party. Some parties even resort to a coin toss (but we don’t recommend that)!
Third and finally, you should consider and agree upon a process to handle the exit of one of the owners. This exit may be voluntary—in a case where someone receives a new job offer, decides to retire or moves, or involuntary—such as when a party dies or becomes disabled. How will the company interact with the departing owner or the estate? Will there be a buyout? On what terms? Addressing these issues calmly ahead of time could prove critically important in the event of the likely much more stressful circumstances of a partnership dissolution.
It may be uncomfortable to consider the potential end of a business just when it is getting started, but the best time to have these difficult conversations is before disputes arise. If you are a business owner, Rucci Law Group can assist you with these necessary discussions, leaving you free to focus on growing a healthy business.