Got a partner? Do you have a buy/sell agreement that protects you against the 4 Ds?

If you have one or more partners, you need a buy/sell agreement. Don’t skip this step or you will regret it down the road. Trust me on this one.

There are two steps to this process. First, you need an attorney to draft the legal document. Don’t worry, it’s not that expensive. Second, you need a financial expert to help you fund the agreement. (I’m available.)

Let’s back up and make sure we understand the basics. A buy/sell agreement (BSA) is a binding document that spells out how certain events will be handled in the future if they ever happen. That’s it. Except for the fact that most of the “handling” will require money in the future, so there needs to be one or more funding mechanisms in place. Otherwise, the legal document might be useless.

A good BSA will protect you against the four Ds: Death, Divorce, Disability, and Disagreement. I can’t possibly discuss all the details here, but here are the highlights.

Death. If you and I are 50/50 partners in a business venture and I die, what happens to my half of the business? If I’m married, it now belongs to my spouse. If I have a will, it might belong to someone else. I hope you like your new business partner! What if you hate my spouse? What if I left my share to my kid nephew Dogbone? What if the BSA says that if one of us dies, the other one agrees to buy out our share? How will the value be determined? Where will the money come from?

Divorce: If you and I are 50/50 business partners and I get divorced, some judge might decide that in order to evenly divide the marital assets, my spouse now owns some portion of my 50%. Our business twosome just became a threesome. And odds are pretty good that if my spouse and I just got divorced, we certainly don’t want to be business partners. How will we buy out my spouse? Will we do it together? Will I do it alone? Where will the money come from?

Disability: You and I are partners but I get in a car wreck and become disabled and can’t put in my 40 hours in our business. Yet I still own 50%. Should I still get 50% of the profit? How will we resolve this?

Disagreement: You and I are partners and despite the fact that we’ve always agreed on everything our entire lives, you suddenly get the stupid idea that our product should be painted red, while I clearly know that next year’s hot color is going to be blue. After a knock-down, drag-out fight we can’t agree. We now hate each other and never want to see each other again. Who gets the business? Do we get out the chainsaw and cut everything in half? What if we both want to start our own new business and now we are competitors? What if one of us agrees to sell to the other one; how will we decide the value and where will the money come from?

You can see that things could get complicated in an instant. If the partnership involves three or more partners, the complexity could be enormous.

I hope this helps members of the Eve community who either have or are considering a partnership venture. If you would like to learn more, please feel free to reach out and I’ll help in any way I can. You can reach me at [email protected]

 

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