Maybe you were fresh out of college and bursting with ideas on how to launch a business with your frat brother. Things went well, you made decent money, but now something unexpected happened.
Your business partner and his wife are getting divorced. How will the business partner’s divorce affect the partnership, and ultimately the business itself?
Is there a buy/sell agreement in place?
Ideally, when you established your partnership, you included contingencies like divorce or the death of a partner. These are important to incorporate into any partnership agreements because they offer a blueprint to follow when these situations occur.
Buy/sell agreements contractually obligate partners to follow the agreement in place detailing the purchase options for one partner to buy the other’s business interests out and the terms of said sale.
Agreements protect both partners
Having buy/sell agreements in place protects partners from the consequences of the other partner’s divorce. But they are also used as exit strategies when a partner dies or becomes ill or incapacitated.
They are particularly useful because they come into play at especially emotional times when people are often thinking or acting irrationally. Having detailed legal steps to follow makes a difficult process a little less challenging.
What if we didn’t include divorce contingencies?
Failing to include buy/sell agreements that deal with divorce could play out in a few different ways. You could find yourself with a new business partner, either your partner’s ex or a third party brought in to raise capital to buy out the partnership from the divorcing parties.
In some cases, you may decide that you can no longer operate your business under the present conditions and the business must be dissolved.
Prevention is cheaper than the cure
This is just one reason to get a legal review of any self-drafted partnership agreements. Unless you have a legal background, it is just too easy to omit something vital from your partnership agreement that can adversely affect your investment.