Many new business owners comment upon the fact that, particularly in the early days of their business operations, they spent more time with their co-owners than they did with their spouses. And, just as many marriages end in divorce, so many businesses also crash and burn in spite of early optimism and sharing of goals. Many business experts say that it is just as important to incorporate a “prenuptial” agreement into the organizational documents of a new business, as it is for some couples who plan to walk down the wedding aisle.
Common Provisions in Business “Prenup”
While every business agreement has some unique features, business “prenups” should usually contain sections setting forth the co-owners agreement on a number of topics, including:
- Who is in charge? Too many business owners forget the important adage: If two or more persons are in charge of an enterprise, then no one is really in charge. The business prenup should assign specific responsibilities to co-owners, and indicate who has the final say if there is disagreement. If you can’t agree on the basic authority and responsibilities of your co-owners, then you shouldn’t move forward.
- What happens if a co-owner leaves the business? The business prenup should specify how – and if – ownership interests can transferred to outsiders. Rights of first refusal might be given to the other owners. Care should be given to the financing of any internal sales, however. Having the right of refusal doesn’t mean much if the owner cannot come up with the purchase price for the co-owner’s interest.
- How do the owners get paid? Do the owners take a “draw” from operating income? Are profits distributed periodically, or are they poured back into the business? This is an area where hard feelings and distrust can easily arise if the co-owners have different expectations. Make sure that the financial arrangements are clearly set out and agreed upon by those who own a stake in the business.
- Is there an expansion plan? If the co-owners hope to expand the enterprise, will internal financing be sufficient to accomplish this, or will it be necessary to bring in additional owners? To the extent that new owners are needed, the existing owners need to have thought out how their interests may be diluted. How will new shares or partnership interests be valued?
Business Prenups Help Avoid Nasty Surprises
In many marriages, one prospective spouse assumes that his or her values and goals are shared completely by the other. Worse, some prospective spouses actually anticipate specific disagreements ahead of the nuptials, but delude themselves into thinking that they will be able to change the other spouse’s mind on the issue. It rarely happens. In the business world, such a transformation is even more rare. A solid, well-constructed prenup is a great way to put all the cards on the table. Is there really the sort of business agreement between the co-owners that they imagine? Can those co-owners commit to writing their common goals, their concerns, and their plans? The modest resources that are spent on a business prenup will generally be repaid many times over later in the business.
Skilled, Experienced Legal Counsel is a Key for Business Startups
Blado Kiger Bolan, P.S. has over 30 years of combined experience in providing businesses with quality services throughout the Pacific Northwest. We routinely advise business on all sorts of legal issues related to startups, business operations, the legal landscape, and other important matters. Because of our firm’s extensive experience in business litigation, we are also better equipped than many law firms to help you avoid expensive litigation. For assistance with any business agreement or any other type of business issue, contact us on the web, or call our office at 253-272-2997.