If you are in business with one or more partners, it is critical that you have the proper agreements in place in case something goes wrong. Too often, people go into business together without giving any forethought as to what might happen if things do not work out, according to Aaron Lepp, a partner at Stark & Knoll Co., L.P.A.
“If you are serious about starting a business, then you need to realize that it is a major commitment of your time, energy, money and life,” says Lepp. “With so much at stake, you want to make sure everything is adequately protected, and this means you need to make sure you have an agreement in place to the extent that your business has multiple owners. It should not even be an option.”
Smart Business spoke with Lepp about how to create an agreement that will help protect business owners, together with their businesses, from issues between co-owners.
What should be included in an agreement between business owners?
The first is a management provision. This spells out who has the authority to manage and operate the business. Management provisions allow owners to define roles, streamline the business and operate more efficiently. For example, in a multiple owner business it would become burdensome if all owners had to meet every time the business had to buy equipment, order supplies, or hire and fire employees. Management provisions can delegate what authority and duties each owner has. And while a well-drafted management provision may give authority to one owner to unilaterally make ordinary course decisions on behalf of the business, it would not typically give an owner the unilateral authority to make non-ordinary course decisions, like settling a lawsuit, as some decisions are better left for the group.
What else should be in the agreement?
You need buy/sell provisions. When a person goes into business with someone they generally want to be in business with that particular person, not with some third party who they do not know. Buy/sell provisions help with this by placing restrictions on the ownership of equity and its transfer. That is, buy/sell provisions define who may own the equity of the business and under what conditions it may be transferred. Thus, they allow owners to control what happens to the equity should certain events occur, such as an owner dying or an owner’s equity becoming subject to a court order in a divorce. An agreement might state that upon the occurrence of one of these events the remaining owners and/or the business have a first right of refusal to purchase the equity.
There would also be a provision establishing the purchase price for the equity and the payment terms. This allows owners to set the price and terms ahead of time, and thereby avoid arguments, which may otherwise arise at the time of sale without an agreement. Keep in mind that an owner who is being bought out is often in no mood to negotiate, and especially relative to price (e.g. if an owner is leaving on bad terms). The idea is to make sure that the owners have as much control as possible over what happens to the equity in their business.