Much like a marriage, it “Takes 2” (or more) to make a business work. However, things don’t always go according to plan, and as Senior Associate Emmanuelle S. Litvinov explains, that’s why you need to be proactive in preventing a messy corporate divorce by doing your due diligence when establishing your business.
Transcript:
Business partnerships can be a lot like personal relationships — not all of them will last forever. So what happens when separation is necessary? That’s where corporate divorce comes into play, and the topic is one I covered in a recent DE Insight.
When separating business interests, the process will go only as smoothly as the strength of your governing documents. When you laid the groundwork for your business, did you lay out clear financial protocols and decision-making processes, or were you so excited to start your business with your longtime friend you began with a simple handshake deal?
If it’s the latter, you may have a maze of legal, financial, and operational challenges ahead, and the process can be overwhelming for those unprepared. Experienced legal counsel can help guide you on the best path forward, but we want prospective business owners to consider the value of building that strong foundation at the outset.
With that said, some things you should be considering: How will you set parameters for valuing the business? What terms trigger a buyout? How will buyout payments be funded, and on what schedule? Have you built in right of first refusal provisions? Have you considered drag-along and tag-along rights? Those are just some of the many questions you must consider to build your business’ foundation correctly.
Remember, while having this conversation early on may seem tedious, it will ultimately save you time and money down the road. Just like in personal relationships, those with a strong foundation tend to be the most successful, and chance favors the prepared mind. Your legal counsel can help protect your personal and professional interests.
