Two Problems to Solve Before Starting a Business with Another Person | Southernminnbiz
You’re with your friend or at a family reunion chatting with a friend or family member about how everyone despises their respective jobs, and the ball starts to roll.
“I have a great business idea,” she says. You are not happy with your current situation, you want to work for yourself, and frankly this is a great idea for a business. Going into business with a friend or family member can be fun and successful. However, there are many issues that can arise in running a business between the two of you that, if left unresolved in the first place, can destroy the business and the relationship. Here are two key issues that many business partners do not adequately address before starting a business.
Capitalization agreements (recapitalization). Many small businesses are initially funded by capital provided by business partners. Once the business is up and running, there is often almost always a need for additional capital to ensure continued success. Funding can be available by taking out a small business loan that the business (and often the owners as well) is required to repay. However, financing can also be done by owners providing additional capital to the business. This can be extremely problematic because in most business entities ownership is pro-rated based on the capital contributed by stakeholders. If your aunt, for example, brings in additional capital, it can change control and ownership in the business by giving her more financial and governance rights over you. A capitalization agreement provides for what happens if a stakeholder does not put in the necessary additional capital in its share as agreed or if (as is often the case) a stakeholder lends proportionately more money to the company than it does. ‘another holder. of interest in the business.
The drafting of a capitalization agreement will anticipate what happens if a stakeholder does not put in its share of the necessary additional capital as agreed, or if (as is often the case) a stakeholder proportionally more money to the business that another holder of an interest in the business is doing.
Think of a business relationship like a marriage. At some point, it’s going to end. Business partners retire, move, become disabled and die. A well-drafted buy-sell agreement allows for a smooth transition of ownership succession for the business. A typical buy-sell agreement works in three stages: 1. It specifies trigger mechanisms that give the company or a stakeholder the right (and perhaps the obligation) to buy back the interests of a company. other stakeholder. Common trigger events include an offer to purchase a business interest, marriage dissolution, insolvency, retirement, death, dismissal of the owner from his or her managerial position, or an impasse between stakeholders. 2. It provides a price or method to determine the valuation at which shares or member units can be purchased. 3. It specifies the conditions applicable to such a purchase and possibly its source of funding such as disability or life insurance.
As one savvy business lawyer once said, “The existence of a clear code of rules for corporate governance and property succession greatly reduces the possibility of a knife battle.”
Jacobsen is a lawyer with Northfield-based Jacobsen Law Firm PA.