Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

BENEFITS OF FORMAL BUSINESS AGREEMENTS
(10/28/01)

One of the problems we have seen with business owners is the failure to properly document business activities. Now, I'm not talking about keeping accurate records, filing franchise tax returns, and the myriad of details every business should be doing anyway. Those are clearly important and it would be difficult to run a business without taking care of these routine record-keeping requirements.

No, what I'm talking about goes beyond those important but mundane matters. What I'm referring to is documenting your activities with your suppliers, your employees, your customers and your prospective purchasers.

If you are in the business of selling products, you should have inventory control sheets and sales agreements. If you are in the business of manufacturing products, you should have manufacturing agreements, purchase orders, financing and credit agreements, and so forth.

Without a written agreement, you are asking for trouble. If there is a dispute, and eventually there will be one, it will be very difficult for you to prove who was supposed to do what.

And don't just sit down and throw something together. A few dollars spent now for a properly prepared document will go far toward avoiding problems and unnecessary cost later.

One area in which agreements are particularly important are the sale or purchase of a business. Often clients sit down with the potential buyer or seller, hammer out a few key terms, shake hands, and everyone heads out the door. That's fine if everyone remembers (and agrees on) what was said and then follows through. Unfortunately, many times clients come to us when the deal has already gone south and want us to try to patch it back together. By then, it's too late.

The time to hammer out and "lock down" the terms is now, while everyone likes everyone else, euphoria is in the air, and people will agree to almost anything to close the deal. Later, when the honeymoon is over, is far too late to try to "paper" a deal that has gone sour.

In one case of which I'm aware, the buyer bought a business and all the included inventory and equipment--or so he thought. When he showed up to take possession, he found himself staring at an empty building. And according to the few documents available, that was all he had bought--and for a premium price.

The same problem is confronted by sellers when the buyer fails to come up with the required capital or starts making unrealistic demands. In the absence of a formal "Buy-Sell" Agreement, it is anyone's guess as to which party is right. They were each touching a different part of the elephant while blindfolded and their perceptions of what was going to happen turned out to be as different as night to day.

If you are going to be buying or selling a business, you need to sit down with a business attorney who can walk you through the steps, analyze exactly what it is you are buying or selling, create the necessary documents to be sure the other party understands what is happening, and then structure the transaction in such a way that everyone can go away happy, secure in the knowledge that there aren't any loopholes or missing parts.

Let's say you are involved in a family business. You built it up from the ground and you have been the driving force since its inception, but other members of your family own an interest in the company, as well. You are ready to step back or even retire, sit on the porch, and watch the world pass by, but you want to be sure nothing goes bump in the night.

To make sure your dream retirement doesn't turn into a nightmare, you need a structured "Buy-Sell Agreement" to smooth your transition. It will spell out the value of your respective business interests (which can be helpful if the IRS or OTC steps in and wants to overvalue your share), the names and respective relationships of the parties, the terms of the agreement, the responsibilities and obligations of each party, and anything else that is important to either party.

Think of the "Buy Sell Agreement" as a "Will" for your company. If it is set up property, it will identify how your (or your family partner's) interest will be dealt with if you die, become disabled, or retire. Who can buy your share? Under what terms? At what value?

A "Buy Sell Agreement" is absolutely essential if you own a family (or any other form of) closely held business. The attorneys and accountants around town will agree with that statement. Unfortunately, most such business owners don't have one, either because they don't know about them or just haven't taken the time to set one up.

Because the agreement spells out the key terms and conditions for a transition of ownership, it will eliminate disputes between the owners and make the parting an amicable one, rather than causing undue strain and bad feelings.

It also helps you raise money for your business while you are still active in it. Banks know how important an owner is to a closely held business and they won't approve a loan unless they know your exit strategy should you decide to leave and how the loan is going to be protected. The agreement gives the bank all or most of the information it will need.

If you take the time now to plan for a smooth transition later, you will find yourself more relaxed and able to hand over the reins without undue concern when it comes times to step aside and let someone else assume the mantle of leadership and ownership.

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