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Does your “Pre-nuptial” agreement pass the test?

Take this quick test. If your shareholders agreement, LLC operating agreement, partnership agreement or other buy-sell agreement was not prepared with adequate consideration of the following issues, it may not be much help in a business divorce:

  • What contribution is each owner making to the business in terms of cash, property, ideas/technology, business contacts, know-how or commitment to hard work?

  • Will the business need additional capital, and, if so, are the owners committing to contribute additional money or provide personal guarantees?

  • Will each owner’s contribution to the business change over time and, if so, how should that affect the relationship?

  • What should happen if a business owner is no longer contributing to the business to the satisfaction of another owner?

  • How are day-to-day decisions made, and how will extraordinary decisions (for example, whether to sell the business, merge, take on a new partner, acquire another business, etc.) be made?

  • What should happen if the owners disagree over any day-to-day or extraordinary decision?

  • If there are more than two owners, what relationships among certain owners could lead to “ganging up,” and has the decision-making process for management accounted for loyalties/bonds between certain owners?

  • How is compensation to the owners determined?

  • Can an owner be terminated as an employee?

  • Are the owners equally capable of operating the business without each other, or does any owner have critical know-how or customer/referral relationships without which the business could not survive?

  • Is there a clear line between the intellectual property or goodwill belonging to the business versus an individual owner?

  • What rights should an owner have to become involved in a competing business, or a business that is related but not competing?

  • Do any owners have the financial resources to buy out the other(s)?

  • What should happen if an owner dies?

  • What should happen if an owner becomes disabled, and how is “disability” distinguished from laziness?

  • What should happen if an owner wants to resign?

  • What should happen if an owner stops working hard for the business, and who determines what it means to work hard?

  • Does any owner have children, and what ability should an owner have to bring children into the business?

  • What should happen if the owners disagree over bringing an additional owner into the business?

  • What should happen if certain owners want to transfer ownership interests to other owners, changing the relative percentage ownerships?

  • Should an owner who is bought out be bound by a non-competition, non-solicitation or similar restriction to protect the business?

  • How is the value of the business likely to change over time, and what is the best way to determine its value at any point in the future?

  • Do the owners have an ultimate exit strategy, and, if so, how can it be achieved?

  • What happens if the business or an owner cannot afford to make payments for a buy-out when required under the agreement, and what protections and remedies do the selling parties have?

  • Could a buy-out under the agreement cause a default under loan documents with the bank or any lease, license or other material contract that prohibits a “change of control” or “change in ownership?”

  • Should an owner who wants to separate from a business partner have a means of doing so, other than resigning and being bought under the agreement (particularly if the sale price is less than fair market value)?

  • If an owner should go through a marital divorce, what impact might that have on the business?

  • What rights to information regarding the business should each owner have?

  • How will the regular CPA firm be selected, and what relationship does each owner have with the accountants?

  • What resources do the owners have to litigate with each other, and how would a dispute among the owners likely affect the business and each owner?

  • Have the owners agreed on a forum for resolving disputes (for example, courts of a specific state or arbitration)?

Sometimes it will be in the best interests of one or more owners to remain silent on a particular subject, but a “pre-nuptial” agreement should not omit to address an issue merely because the lawyer failed to consider the issue or bring it to the owners’ attention for their consideration.

Because the answers to the questions listed above will differ for each business and its owners depending on individual circumstances and relationships, there is no “standard form” of agreement that would suffice in all cases. The lawyer preparing the agreement should assist and guide the owners in finding approaches that best fit their situation. The process of raising and discussing the issues, if handled well by the lawyer, should promote greater understanding among the owners as to their respective rights and responsibilities and help establish reasonable expectations, reducing the risk of a bitter and costly business divorce.

If your shareholders agreement, LLC operating agreement, partnership agreement or other buy-sell agreement was not crafted by a lawyer who explored each of the areas listed above, you may wish to have your agreement reviewed by another lawyer.

This document is intended for general information purposes only. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific facts and circumstances. See “Disclaimer.”

Curt Golkow Photo
Curtis L. Golkow
Attorney At Law

Two Penn Center Plaza
Suite 910
1500 John F. Kennedy Blvd.
Philadelphia, PA 19102

T: 215.814.9090
F: 866.521.9742
e-mail Curt
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