Professor, attorney, and author of Business Planning: Closely Held Enterprises, Dwight Drake has some useful advice for would-be entrepreneurs:
“When the entrepreneurial bug bites a group of charged-up business owners, they usually are focused on making the business succeed, maximizing revenues, and minimizing expenses. They have little interest in discussing potential breakups, the risks of the three big “Ds”— death, disability and divorce — and all the other issues that should be addressed in a well-structured buy-sell agreement. A good advisor will help the owners look at the big picture and consider the entire life cycle of the business.
“Business owners need to prepare early for the day when they will part company for whatever reason. At some point down the road, they are each going to want to or have to cash out their equity interest in the business. Somebody is going to leave the business, die, become disabled, or experience a messy divorce. Plus, the owners should acknowledge the simple reality that no matter how good they feel about one another going into the enterprise, tough business decisions may create friction along the way. Friction often leads to a buyout or, worse yet, a legal blowup.
“Potential separation issues are best addressed in a calm, planning-oriented atmosphere, not at the point of crisis. Preferably, the job should be done at the outset of the business when all parties are making important decisions to devote capital and energy to the business enterprise. Encouraging clients to collectively think about the key issues up front often will bring to the surface diverse expectations that may surprise everyone. It usually helps to have these expectations out in the open before irrevocable commitments are made to the venture. Too often, the parties plunge ahead with little regard for the consequences of their inevitable separation down the road.” (emphasis added)
Consider yourself warned. (It’s not a large leap to apply this advice to estate planning as well.)
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