Why do we need legally binding agreements?

August 14, 2024

Why do we need legally binding agreements? Many business owners think that if their partner is a trusted friend or family member, they can skip the formalities. Yet, when a crisis occurs, people find it difficult to remember what was agreed upon with a handshake years ago. As the saying goes, “Time kills deals.”

Your business needs backup plans in place for when (not if) one of the 5 D’s occurs. These are death, divorce, disability, disagreement, or distress. If you need a refresher, you can read more about the 5 D’s in these past newsletters, including a bonus D — “Don’t want to do it anymore.” Decisions on how to handle situations involving the 5 D’s should be made when there is no immediate crisis and when everyone is of sound mind. This planning, done while everyone has a cool head, can save friendships and family relationships down the line.

ChuckM@EagleCorporateAdvisors.com

BrianM@EagleCorporateAdvisors.com

(702) 451-3250

What kind of plans should be formalized using legally binding agreements?

Here are a few examples of situations to address ahead of time:

• What occurrences will trigger the buyout process?
• How will the business be valued for a buyout?
• How will payouts be structured for a buyout?
• What happens if one partner wants to retire?
• If an attractive buyout offer appears, can one partner hold up the deal?
• What happens if there is a bankruptcy?
• What happens if one partner is found guilty of a crime?
• Who are the individuals, if any, who can take over a partner’s position?
• Which individuals, if any, must not be allowed to inherit the business?

Use a trusted attorney to ensure the agreements are fair and enforceable. Some of these questions need to be revisited regularly, and all parties must be kept aware of the agreements in place. Consider reviewing each time you update your business valuation, which should occur at least every 18-24 months.

Make sure spouses and family members know about and understand the basics of these agreements. At Eagle Corporate Advisors, we encourage spouses to attend the quarterly ownership workshops we hold, since spouses often act as silent partners and should have an accurate picture of the business’s direction and valuation. These “silent” partners could become full partners in the event of a death/disability — so it’s wise to spell out ahead of time what interest, if any, a spouse or child will inherit under these circumstances. Remember, Nevada is one of nine community property states.

Finally, although it may seem like a common-sense choice, remember a 50/50 split in a business is never a good idea. Having a majority and minority partner ensures there can never be a deadlock on any decisions. Deadlocks can kill a business.

“A verbal contract isn’t worth the paper it’s written on.”
— Samuel Goldwyn, movie producer

Safeguarding the survival of your business in the face of an unexpected event, like one of the 5 D’s — death, divorce, disability, disagreement, or distress — means asking questions you might not have thought about. Eagle can help you find answers to these questions and facilitate a meeting to get all parties on board. It’s all part of developing a solid road map to increase the value of your business. Call us today to discuss your goals.

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