The biggest mistake that business owners make is failing to plan. Failing to plan has some of its most devastating consequences in the context of an owner leaving the business.
Consider the following questions:
Do you want to be in business with your partner’s spouse? If you don’t plan properly, you may unexpectedly find that you have a new partner if your partner dies or is divorced.
Can your business survive the death or incapacity of one of the owners? Even highly profitable companies find it difficult to buy out the deceased owner’s interest in the business from cash flow.
What happens to your business if you and your partners cannot agree on how to run the company? You may spend a small fortune in legal fees separating yourself from the business if you have not outlined a way to resolve disputes.
If you have business partners, you need a buy-sell agreement. Ideally, you should prepare the agreement when you set up the company. If you have not already formed set up your buy-sell agreement, do so immediately to ensure that you have a plance in place to address the transition of the business.
A buy-sell agreement typically discussess how one owner can sell his interest to the other owners, setting forth the methods of calculating the purchase price and of establishing the terms of sale. Not only does it provide a mechanism for resolving disagreements between owners, but it also provides an orderly way to handle the death, disability, illness, bankruptcy, divorce, or retirement of one of the owners. Among other things, a buy-sell agreement considers the following matters:
A properly drafted buy-sell agreement allows the ownership and management of the business to continue without having the departing owner’s successor forced on the remaining owners. It also fairly compensates the departing owner for his interest in the company, while still meeting the liquidity needs of the company. Once the agreement is in place, you should review and update it regularly to ensure that it continues to meet your individual and company needs.
Avoid the Ten Fatal Mistakes by making planning a regular part of your business activities. Prepare and regularly review a buy-sell agreement, and your business will boom.
I am, first of all, a husband and father. Rebecca and I have been married 23 years; we have four children ages 21, 19, 18, and 15. My family is my greatest joy in life. For 24 years, I have practiced business law in Arizona, the past eleven as the managing partner of Gibson Ferrin, PLC. We help businesses and their owners meet their business and personal goals. My practice focuses on the intersection between intellectual property law and employment law. I help businesses prosper by properly managing their intangible assets.
I am licensed to practice law in Arizona only. Though I believe the advice in BiziBoom™ is based on sound legal principles, the law of your jurisdiction may be different. The advice given on BiziBoom™ is informational only; it may not be applicable to your specific situation. You should seek the advice of competent counsel in your jurisdiction, someone who knows the particular legal requirements of your jurisdiction. Until you have signed an engagement letter with Gibson Ferrin, PLC, neither the Firm nor I are acting as your legal counsel. Nothing on BiziBoom™ creates an attorney/client relationship between you and the Firm.