Going into business with another person always seems like a good idea or we wouldn’t do it.  Sometimes a joint business venture turns out to be great and sometimes in turns friends into enemies.  If you do decide to go into business with someone else, you should have some kind of business agreement.  This agreement may be a partnership agreement, LLC operating agreement or some other type of contractual arrangement.  We often think of the business agreement as stating how the partners will get into business but it is often even more important to address how the partners can get out of business with each other.

Business agreements help you get out of business, too

One issue to address is how easy or hard is it for a partner to leave.  If the partners agree on an easy exit, the agreement can say that any partner can leave at any time.  The remaining partner can either buy out the exiting partner or the company is dissolved and the assets sold or distributed.  The benefits of an easy strategy is that no partner gets stuck in a business he no longer wants to be in.  The disadvantage is that a disgruntled partner can use the threat of leaving the company as leverage against the partner who wants to continue the business. 

Alternatively, the agreement can be designed to make it difficult to leave the partnership.  This strategy is often used with LLCs holding family farm land.  We do not want to make it easy to dissolve the LLC, the goal is to protect the family land and pass it down to future generations.  In this situation, the agreement is often written so that essentially the only way a member can leave is to for another family member to buy him or her out.  No one person can force the LLC to dissolve.

Another issue is how to wind up the business after the partners have decided to dissolve.  It is inevitable that partners involved in a dissolution are going to disagree on the value of at least some of the assets held by the partnership.  The agreement should have a plan to value assets.  A typical plan will be to appraise the assets.  If a partner disagrees with the appraisal, he can hire his own appraiser.  If those two appraisers cannot agree, a third and final binding appraisal is obtained.  This process ensures that a value is ultimately reached without ending up in a courtroom.

Even the best agreements cannot foresee every issue that might arise. There may be a dispute arise that the partners cannot agree upon and which the agreement does not address.  Business agreements often contain mediation and arbitration provisions to resolve disputes.  These terms are meant to enable resolve disputes more quickly and easily that filing lawsuits and ending up in a courtroom.  Typically the agreement first requires mediation which involves a neutral third party helping the parties try to come to a mutually agreeable resolution.  If mediation does not work then arbitration is next.  Arbitration is a sort of mini-trial where an individual or a panel hears each party’s argument and renders a decision.  The arbitration decision is binding and is in lieu of a court judgment.

The above items are a few of the more important items to include in a business agreement to allow the partners to separate with as little conflict as possible.  The agreement cannot prevent hard feelings, distrust and resentment between separating partners but it can provide a pathway towards separation.  The agreement may allow the partners to move beyond the failed business venture instead of getting embroiled in legal battles.

Moore is an attorney with Wright & Moore Law Co. LPF. Email him at [email protected] or call 740-990-0750