BUSINESS ORGANIZATION AGREEMENTS AND CONTRACTS

By Aaron Swimmer
August 26, 2015

According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. But, you have a great business idea and some wonderful potential partners. So why not give yourself a higher chance to succeed from the get-go. That means, as you think about getting into the deal, you sure as heck should be figuring how you are going to get out of the deal.  In fancy lingo, “you gotta have an exit strategy”; and this exit strategy should enable you to exit successfully with your profit. Your exit strategy may be to sell your business interest at a certain time, or maybe it’s to buy out your partners down the road, or some other scenario as each deal can go in infinite directions. The common thread is to do it successfully.

Whatever your particular strategy, to be feasible and potentially successful, you have to look in reverse.  This means as you are organizing up, you must picture the deal after some period of time and then say something like “I want to be out after 10 years, so what do I have to do in 9 years, then in 8 years, 7 years, and so on; and what do I have to do today to make my 10 year plan successful?

One of your most important first steps should be a contract (or contracts) that includes all the terms of the deal.  Most think of this as sort of a marriage contract but more correctly it should be thought of as a divorce contract. You’re not going to drag it out when all is hunk dory. Such contracts are essential not only to establish legal rights and obligations but also to help in establishing valuations.  Your contract must be comprehensive, or it may be impossible to establish the values and the rights within them.  If there are potentials for uncertainty, best case scenario is that you are not able to get your maximum return, worst case is protracted litigation killing any sale and a loss of all your money and years of hard work.

Today’s courts generally find that the contract terms, or the 4 corners of the contract, are just as important, if not more important than existing laws.  This is because all deals are unique and inevitably there are gaps.  Therefore, it is up to you, acting on your own self-interest, to take care of yourself in any transaction.  It is foolish to believe the law alone will cover you; and if you enter deals believing the other side will look out for you, you’re almost always going to be wrong and find yourself in a very unfavorable position.  Without the benefit of thoroughly written contracts, you may not be able to fulfill your exit strategy and you may find yourself in litigation, especially if the business is successful!

So Rule #1 in planning how to exit successfully is to go into the deal responsibly.  This means that you must have thorough agreements drafted to make certain that your contracts protect your endgame, the exit strategy.   If the contract is not thorough enough or is vague and uncertain, any savings you thought you had achieved by scrimping in this area will likely be more than wiped out in legal fees at the wrong time.  The wrong time is when there is that pot of money on the table and when it is exit time.  That’s when you may find that all the money you thought you were going to take off that table may end up in the pockets of attorneys who should have been engaged when the deal began.  There is no such thing as a 1-page agreement that will protect all of your rights; a 1-page agreement is generally not worth the paper on which it is printed. “Help me” is almost always cheaper than “fix me.”

Ask yourself this, if your idea is the one-in-a-hundred that is successful and you have failed to lay this proper legal foundation, how are you going to feel in 10 years when others make all the money and you get none?