Written By: Phil Kabler
In order to create most Florida business entities, such as corporations, limited liability companies, and certain types of partnerships, the founders must file articles of formation with the Florida Department of State – Division of Corporations [www.sunbiz.org] and pay the related fees. Typically the founders also prepare ‘rules of the game’ such as corporation bylaws, limited liability operating agreements, and partnership agreements.
With those two basic documents in-place the founders set the stage for their companies’ operations.
One category of documents which is often neglected are those describing the ongoing relationship among the owners. Typically those relationships work just fine – the parties understand their roles in their company, they know how they will be compensated, and they know the intersection with their families and estate plans.
Understanding is fine. It is natural. But, as with all human relationships, sometimes the parties over time reach a ‘loggerheads’, an impasse, which slows or stops the business from growing, operating as intended, or even functioning at all. The implications to stakeholders such as customers, employees, vendors, lenders, and investors can be devastating as outputs and cash-flow are disrupted .Those interested third-parties depend upon the existence and success of the venture for their own purposes.
So the owners may find it is best to ‘breakup’. Not necessarily to shutter the business, but to remove one or more of the disagreeing parties from the equation and resume customary operations for the good of all.
This is not a new or unique situation. Anyone who watches popular television shows or movies is aware of marital prenuptial agreements. To make life easier ‘in case’ the marriage does not work-out, betrothed parties can determine in advance who will get which assets each brought into the marriage at the outset and which continue to accrue. Doing that in advance tends towards a more effective, efficient, and economical separation of interests, and can lower the overall costs of a parting-of-the-ways should that become necessary. (Meaning during a drawn-out family court lawsuit.)
Now, think exactly the same way about business owners. Everyone enters a new venture hoping for monumental success. No one enters that business considering the ‘what if’ we ‘divorce’ scenario.
That is a major function of owner agreements. Yes, they will address the typical matters explained above. But through the vehicles of shareholders agreements for corporations or components of operating agreements for limited liability companies and partnership agreements, the implementation of a potential ‘break-up’ can be negotiated while the owners are still amicable. (And if the parties cannot even reach even that agreement, they have serious food-for-thought as to whether they want to join together in the first place.)
Examples of matters to be addressed in ‘business pre-nups’, whether they be stand-alone documents or parts of other ones are:
- Pre-determined reasons to separate
- Interim measures to attempt reconciliation
- Who buys and who sells
- How to value the equity interests being sold
- Who pays for appraisals
- The buy-out steps
- Escrow holds and releases
- Post separation confidentiality, non-disclosure, and non-disparagement
What is the downside to not having this ‘what-if’ sort of ‘break-up’ agreement in advance? (Besides hard feelings.) Potentially protracted and expensive litigation with unpredictable outcomes based upon the applicable statutes and case law.
The take-away for even the most optimistic business founders? Prepare a ‘business pre-nup’ with your other start-up documents. As with all business formation and operation matters, interested founders and owners should consult with their attorneys sooner rather than later.