It's that time of year when we remember a historic coming together of two sides, each of which had much to be wary of. I'm speaking of Pilgrims and Indians, but I'm also thinking about partners in business.
During this month's Inc. Business Owners Council: Greater New York "Let's Get Down to Business" event, our topic was partnership agreements. In particular, we focused on the downside of partnerships: the deaths, divorces, disabilities and other hazards of life that can bring a business down when there's no planning in place that considers the affects of such events.
Most would agree that a death of a partner or a key employee would deliver a shock to a fragile business eco-system. But a far more likely scenario, according to the statistics, is a disability or a divorce. Most in attendance at the event, when asked if they were prepared to be in business with their partners' spouses, were strongly opposed to that idea. And yet it happens.
We circulated a white paper, written by Russ Alan Prince, Hannah Shaw Grove, and Ted Tafaro entitled "Unprepared for the Unthinkable." I posited to the group that the reasons for planning for such an event should be second nature to business owners at this point. After all, most of us have begun planning for a second macro-economic event (by building up cash reserves or diversifying our banking relationships) in the wake of last year's credit crunch. It stands to reason that an event which occurs within our business, while equally unexpected, is far more likely to occur than a once-in-a-lifetime financial domino effect.
Our speakers were top-notch, each with something unique to offer:
Michael Ellison, a business owner (along with his father) of market research firm, Corporate Insight, offered a glimpse inside his own planning process so others could learn from his thought process and his mistakes.
He was joined by Todd Angkatavanich of law firm Withers Bergman. Todd is a longtime friend of Michael's and, together, they walked us through the partnership planning they'd done for Michael's business over the past several years.
It's safe to say that most attendees in the room were uncomfortable with some of the issues being raised. They agreed that these kinds of discussions were much harder than the ones they first had when they started their businesses.
That's precisely why the best time to conduct these conversations is when things are relatively hunky dory between you and your partners, says Todd. When things are going well, you can imagine yourself on either side of the "Three Ds"--death, disability, divorce--situation. So you don't want to cut any kind of deal that you, yourself, wouldn't want to be subject to, no matter which end of the table you find yourself.
Todd laid out four clear steps for us to consider when constructing our partnership agreements (he also shared that the cheapest way to get a partnership agreement done is to have given each of these some thought before bringing an attorney into the mix).
Step one: If something happened to your partner and you are buying shares from him/her, is your partner a family member? Or a professional colleague or friend? The I.R.S. cares. If it's a family member, they assume that your deal is "cooked" and your numbers are not based on fair market value. If it's not a family member, they will scrutinize less.
Step two: Lay out the scenarios for each of the different possibilities. What happens in the event of a death? Divorce? Disability? Bankruptcy? Voluntary retirement?
Step three: What's the formula for determining the fair market value of the shares?
Step four: What are the different ways you might pay your ex-partner in each of these events? A loan from the company? A life or disability insurance policy? And is the buyout required? Or is it optional?
These are the big issues partnership agreements raise. Like Pilgrims and Indians at the Thanksgiving table, we'll have to work these out with our partners if we are to be prepared for the unthinkable events of life.
I'd like to especially thank our sponsor, Exceptional Risk Advisors and its CEO, Ted Tafaro, for joining us on this three-state tour during a balmy November. Like the hair club president, he's not only our sponsor, he's also a past member of a family business.
Your hospitality made each event a friendly and warm gathering.
That's it for the 2009 program year, folks. We'll be back in January 2010 with an electric program designed to help business owners reach higher heights and make the year a big success. Thanks to all who participated in 2009 and, as ever, if you'd like to learn more about Inc. Business Owners Council, please feel free to contact me at: email@example.com.
LEWIS SCHIFF | Inc. Business Owners Council
Lewis Schiff is the executive director of the Inc. Business Owners Council. His latest book is Business Brilliant: Surprising Lessons From the Greatest Self-Made Business Icons.