Starting a business can be overwhelming. Staying in business can be difficult. However, smart planning can make the process less complicated and help assure a smooth future. What is smart planning? Smart planning is being prepared. Smart planning is PREVENTION. Let's look at Jack and Jill, best friends for fifteen years, who have gone into business together. They are successful and their business thrives. What can possibly go wrong? The unexpected can happen, such as:
- Jack decides to leave the business and insists that Jill buy-out his interest for an unreasonable amount of money, in cash, or
- Jill leaves the business, taking with her the client list and several clients, and opens a competing storefront across the street from Jack, or
- Jack accrues a huge amount of trade debt, without Jill's knowledge, placing the future of the business in jeopardy, or
- Jill dies, leaving her interest in the business to her spouse, who just doesn't get along with Jack.
Any one of these occurrences could mean the end to a successful business. But there are preventive measures that Jack and Jill could take to avoid, or at least minimize, the cost and other consequences of these events without bringing about the demise of the business. For example:
- To prevent a costly legal battle between Jack and Jill over the value of the other's interest, they can execute a Partnership Agreement which outlines the way in which each partner can withdraw from the business, sell his interest to a third party and/or sell the interest to the other partner based on a predetermined valuation formula;
- To prevent Jill from leaving the business with the client list, or with the clients, they could execute a Non-Compete Agreement which would prevent either of them from competing with the other in a particular geographic area for a set amount of time as prescribed by law;
- To prevent a collapse of the business or personal liability for the debts that Jack incurred, Jack and Jill can state in a Partnership Agreement who may incur debt or that they must both agree before indebting the company. This would protect the partners and the business from the poor management of one partner;
- To prevent Jack from having to work side by side with Jill's spouse, or having Jill's spouse involved in the business at all, Jack and Jill can execute a Buy-Back Agreement requiring their spouses to agree to the sale of the business to the surviving partner should one die.
These are just a few of the many ways that smart planning can protect the future of your business and avoid costly litigation.