When I was young, my father told me to never get into a 50/50 ownership arrangement with your business partner. Now that I’ve grown into an attorney who sometimes deals with these businesses, I thought it might be useful to talk about some of the ways to avoid a 50/50 situation or some considerations that are important going into one.
First off, this only pertains to LLCs and corporations. Partnerships are immune to this distinction for the purposes of our discussion. The reason that that I’m writing this is that “business divorce” is not as simple as a divorce in family law. In family law, one spouse needs to want out. In business, you need both partners to agree to the terms of the divorce before one can occur.
How do people get deadlocked in a situation where no one can get out, yet no one likes each other anymore? The line of thinking is simple: I don’t want less than 50% because I don’t want to lose control of my investment. This is especially true in a case where there are just two people involved. However, this leads to a situation where there is never a majority without unanimity, which is a catastrophe waiting to happen. If both people don’t agree to the terms of one of them leaving, they’re stuck!
You need to be realistic and acknowledge that things may go badly:
It’s easy to be optimistic at the outset thinking that both of you will have the same work values, the same goals for the company and that it will work out well. Contracts and agreements aren’t so much useful when things are great, they are pulled out when things are tense. So make an agreement with the worst-case scenario in mind.
Have a conversation before you jump into a 50/50 ownership situation that covers:
Many people these days want the legal shortcut. Just give me a document that covers the bases and I’ll be on my way, thank you. But a website or standardized form doesn’t consider your specific situation. Each company has a particular set of needs, risks, or other issues that warrant specific language and provisions that others don’t need. A standard form is a blunt instrument that doesn’t tailor anything to your situation.
Once the honeymoon phase in a business relationship is over, the standard form will probably fail to have provisions in place that are meant to save you both lots of time and money. Litigation over a business costs much more than having an attorney prepare corporate documents on the front end.
Some possibilities when things are deadlocked are arbitration, and a buy-sell agreement. Arbitration (Tex. Civ. Prac. & Rem. Code § 171.001 et. seq.) can be helpful since courts can be hesitant to decide exactly how to split a company, especially if the judge doesn’t know the industry and standard business practices. In arbitration, you can select your arbitrator and select one with the experience that makes a decision more trustworthy.
A buy-sell agreement is like when you were young and in order to split the last slice of cake one person would cut and the other would pick which have they wanted. It provides that one person throws out a number that they would buy or sell their half of the ownership for. Then the other person decides whether to buy or sell at that number. It makes the first person consider their choice carefully because they don’t know if the second person will buy or sell, encouraging a fair valuation of the company’s worth.
If you need help drafting your business agreements or setting up a corporation or LLC, contact Hayes, Berry, White & Vanzant, LLP for help.