Most people starting businesses together don't like to contemplate the day when their partnership may unravel. But the staggering number of partners who eventually come to blows with one another suggests that some sort of prenuptial agreement might be wise. Steve Roth, a principal with CR Management, a turnaround firm in Lexington, Mass., is a fan of an approach he calls "the Texas showdown." The showdown uses a presigned agreement to force a resolution quickly -- and bloodlessly.
"The minute partners cease getting along, they become terribly unrealistic about what their business is worth," says Roth. The Texas showdown has a built-in mechanism for keeping price demands in check. Long before there's any hint of trouble, each partner signs a legally binding document giving him or her the unrestricted right to buy out the other at any time. If Partner A makes the first offer, that's A's only shot. B then has the option of accepting it or countering. Whoever prevails must close quickly or pay stiff fines to the other party.
"Nobody starts the process until they've done their homework and they're sure they can get financing," says Roth. There's no incentive to bid $3 million if you think the business is worth $2 million: you may have to come up with the money.* * *