Published on Nov 20, 2015
Jeffer Mangels Butler & Mitchell LLP corporate attorney, Bill Capps, continues his series of videos to help business people think about legal issues. In the 4 D’s – Part II, Capps shows that disagreement and disability, though touchy subjects, must be considered carefully when creating business agreements. He goes on to summarize and 4 D’s, and explains that partners are often happier when the 4 D’s are taken into account. To view the 4D's – Part I, click here.
Transcript:Thanks for tuning in to the second of our videos designed to help business people think about legal issues. I say think about issues because the lawyer's job–my job–is to worry about the issues!
How Disagreements Can Affect Your Business – In my experience, disagreements in business often arise because one partner becomes, over time, much more important in the business than the other partner. An example is Joe and John, partners who own a small chain of department stores. At the beginning of their business relationship, they were equally important to the business. However, as the business has grown and prospered, John is now the dominant partner and more important to the business than Joe. John finds Joe merely irritating and resents paying Joe as much money as John in the business. Joe finds John greedy and insensitive, and perhaps dishonest. They have no buy-sell agreement to help them resolve this situation. The buy-sell agreement could have contained a provision which permitted the partner who was willing to pay the most for the business to buy out the other. This generally works best where both partners have equivalent resources. The partner who is capable of running the business goes to outside capital (for example, a private equity firm), to find the capital to replace his partner.
Instead, because there is no buy-sell agreement, Joe decides to commence an involuntary dissolution action relating to the company under the hope that he can bludgeon his partner into reaching an accommodation with Joe. Hundreds of thousands of litigation dollars later, Joe and John settle. No one is happy. The business is certainly not better because of the turmoil.
How Disability Can Affect Your Business – Finally, disability is a touchy subject because there are many kinds of disability, mental and physical. What is the difference between a partner in the business who is simply tired of working and one who is lazy? In my experience, this often comes up, not surprisingly, in partnerships among partners with a big difference in age. If Joan is 60 and Monica is 40, it should not be surprising for Monica to feel Joan is not working as much in the business as she should. If Joan is truly sick and cannot attend to business, then disability provisions in an owners agreement will create a hard and fast standard (for example, inability to work consecutively for three months) which then allows the working partner to buy out the disabled partner's interest for a fair price. A fair price has to take into account that the business may not be worth as much now that Joan is not working in it.
In conclusion, in the excitement of starting a business, partners and family members often don't think to address issues like divorce, death, disagreement and disability. However, by asking yourself the question of the four D's, you will be surprised how frequently this leads to a better deal. Thanks for tuning in.