Do You Need a Business Prenup?

Tim McDaniel | May 15th, 2012

About 25 percent of businesses fail within the first year, according to Small Business Trends.  Only 44 percent survive for four years.  What if your business doesn’t make it?

If you don’t have a buy-sell agreement, things could get hairy. Or if you developed one in haste and never update it, the buy-out probably won’t be fair to all parties. The hassles from litigation that result from faulty buy-sell agreements could last for years and negatively impact your business.

A quality buy-sell agreement should spell out what the value of the stock will be based on a triggering event and how the sale of the stock will be paid for. Discuss triggering events like death, disability, retirement, divorce or termination with or without cause, keeping in mind that the value of the stock paid could be different for each triggered event.

The buy-sell agreement should spell out the valuation process specifically. The following are some critical items that need to be addressed in the buy-sell valuation process:

  • Should discounts be applied for minority interest?
  • What is the standard of value?
  • What is the effective date of the valuation?
  • Does the valuation include any insurance proceeds?

The valuation process of many buy-sell agreements is formula-driven. Most companies’ situations are too complex to base any buy-out based on a simple formula. The best way to avoid costly litigation is for the shareholders to agree on the value of the stock at the beginning of each fiscal year based on an outside valuation.

Starting a business is exciting. You are living your dream, pursuing your passion and taking an exhilarating but calculated risk. And whether you are starting a business from scratch or thinking about expanding or growing an existing business, there are many things you should get in writing before you make a move. You don’t want to think of the potential downfall of your business, but you should.

Contact our Ohio business planning professionals

Are you starting a business?  Hoping for the best, but planning for the worst?  Need help creating your business prenup?  Contact Rea & Associates.  Our Ohio business planning team will help you to create the documents necessary to make sure that your future’s secure, no matter what happens with your business.

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