Why You Must Have A Breakup Clause In Your Operating Agreement or Any Agreement
Interests shift over time - you need to be prepared.
I was recently working with the two founders of an entrepreneurial company. Between the two of them, they still owned most of the company. While they had grown the company substantially since its inception, the two partners began to have some serious disagreements about where they wanted the business to go moving forward-and how their roles would change as a result. Things had gotten pretty heated when I got involved. The two guys were barely speaking to each other. It seemed clear they were headed for a business divorce.
But when I asked them about what kind of provision they had in their operating agreement that laid out how they would break up the company, they just kind of looked at me blankly: they didn't have one.
I can't tell you how common this is where business partners don't have an agreement in place about how to unwind themselves from the business. I'd estimate that at least 20 percent of the issues I deal with as a CEO coach result from the breakup of a business partnership- all of which could have been prevented if they had planned ahead.
And to some degree I get it: it's almost like asking your new fiancé to sign a pre-nuptial agreement on your wedding day. Most founders get caught up in the excitement of the moment and figure that they can always work out their problems later on. Big mistake.
I have seen too many horror-shows where partners-many of them previously close friends-end up hating each other and paying countless dollars to lawyers to try and break up from each other. Just as bad, they put their companies, their employees' lives, and the well-being of their customers at risk by failing to put an agreement in place before things go downhill.
As a way to avoid these nightmares, do the smart thing and pass on the free business agreement template you can download from the Internet and instead hire a competent attorney who is familiar with putting these types of agreements together. While it might cost you a few thousand bucks up front, it can save your literally hundreds of thousands of dollars later on.
A good attorney can walk you and your partner or partners through the key questions like:
- How to you break a deadlock on decisions?
- How will you value the business in the event of a break up?
- How do you decide who buys out who?
- What powers and rights will the owners have?
- If an owner leaves, how will they be paid out and when? Will be it a lump sum or paid out over time?
Again, working through these questions up front might seem like overkill- "we're in love and we'll be together forever!"- you need to believe me that this is much more easily worked out now than when you are at each other's throats.
This advice is equally applicable to other types of business agreements, marketing partnerships, joint ventures and the like. It is all too common for interests to diverge over time and there comes a time to end the arrangement. Ideally, that's amiable and easy rather than nasty and contentious (and expensive).
Better yet, you will never ever need to use the agreement because things work out so well. But if they don't you will be more than glad you took the time to get it right from the start.