Planning for the End in the Beginning

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When most people start a business, their main focus is, understandably, on building a successful brand, service, or product.  There is excitement for the road ahead—networking with mentors and possible investors, signing new leases, testing new technology.  Often, people go into business with their good friends or a family member, and rarely do new business owners contemplate in those early stages all that could possibly go wrong if personal relationships fall apart or if one person decides to leave the business.  A thoughtful and thorough business succession plan can protect the business and its owners in the event of a voluntary or involuntary departure of a business owner.

Whether you draft a separate buy-sell or shareholder agreement or include detailed provisions in your operating agreement outlining what happens when one owner, member or partner of the business leaves, setting ground rules upfront before a problem or departure arises can help alleviate the stress and emotions that any business breakup might bring.  Departure of one owner can take any number of forms and a good agreement will contemplate involuntary or unexpected events such as death or illness and voluntary departures such as a move or decision to pursue other interests. 

Finally, it is important to draft an agreement that accurately reflects the owners’ future goals for an exit strategy.  Many new businesses rely on standard language in form agreements and fail to openly discuss specific needs or possible departure scenarios.  Developing an exit strategy in the initial stages helps owners understand their options and plan for the successful growth and development of the business.

 Some things to consider:

  • Trigger events for sale of ownership interest
  • Transfer of a business interest to an heir or family member
  • Restricting ownership transfer or control
  • How the business will be valued
  • How will the business pay a departing owner (does the company have the necessary capital to buy out the partner, insurance for certain owners, will the business need to find a buyer)