Corporate Pre-Nup

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The statistics are grim on relationships remaining intact between business partners.  This month’s edition of Inc. magazine cites Noam Wasserman, entrepreneurship professor at USC’s Marshall School of Business, reporting that 10% of co-founders end their business relationship in less than one year and 45% break-up within four years.  While these statistics are focused on two-person owned companies, break-ups are at least as common among businesses with multiple owners.  Faced with these distressing figures, this post focuses on concrete actions that business partners can take at the outset when their company is formed or when an investment is made, which our experience teaches will improve their prospects for maintaining long-term business relationships.

Operational issues and the vision for the company can definitely lead to disputes, but in many (if not most) cases, the crux of the conflict between business partners comes down to a disagreement over money—how the financial pie will be split.   Our suggestions therefore key on how the company’s finances are handled.  The starting place is to put an exit plan in place at the outset of the relationship —a Buy-Sell agreement that governs any future Business Divorce.  This “corporate pre-nup” will help avoid litigation and a huge distraction for the company when a partner departs.  We have written extensively on this topic in previous posts (see links below), and adopting a partner exit plan is essential.

But the Buy-Sell Agreement only comes into play when business partners are separating.  There are three specific steps that partners can take when their relationship begins, which will help limit their conflicts and, perhaps, avoid the need for a Business Divorce in the future. These steps are: (1) adopt a dividend/distribution plan, (2) implement an executive compensation plan or formula and require annual valuations of the company prepared by an independent business valuation firm.  Each of these actions is discussed below.
Continue Reading Can We Keep the Band Together: Seeking Long-Term Harmony Among Business Partners

Peace is not the absence of conflict, but the ability to cope with conflict by peaceful means.

— President Ronald Reagan, Commencement Address at Eureka College in Illinois, May 9, 1982.

The business relationship between private company majority owners and minority investors does not have to be a zero sum game—there are positives available for both sides in their business dealings.  But, a win-win approach for majority owners and minority investors needs to begin at the outset when they negotiate and adopt a buy-sell agreement at the time the investment is made in the company, which provides terms that will govern the eventual exit of the minority investor from the business.

A buy-sell agreement will not eliminate all conflicts between company owners and investors, but signing off on a “corporate pre-nup,” which carefully balances the rights of both parties should help lessen the potentially contentious nature of the investor’s ultimate departure from the company.  This blog post therefore reviews some of the critical terms that majority owners and minority investors will want to include in their buy-sell agreement to provide for a more peaceful future Business Divorce between them.  Those terms are listed and discussed below:
Continue Reading Threading the Needle:  A Win-Win Buy-Sell Agreement for Private Company Majority Owners and Minority Investors

The season finale of the hit reality TV show The Bachelor attracted more than 8 million viewers. My wife and teenage daughters help make up this devoted fan base, and watch every episode. Yet, when I question them about whether the subject of a pre-nup agreement has ever come up on the show, I get eye rolls, and comments like, “Dad, don’t be such a downer.”  Assuming that the Bachelor and his new fiancé do make it to the altar, however, the show also does not mention that marriages in the US still have just a 50% chance of lasting despite the continuing decline in the national divorce rate.
Continue Reading Buy-Sell Agreements: Don’t Leave Home (Or Invest) in a Private Company Without One