Set up an Agreement with Your Investment or Business Partner

I've been a subscriber to Dyches Boddiford's email newsletter for about three and a half years. Dyches writes to real estate investors about investment/business strategies and asset protection.

In his most recent newsletter, he writes about the importance of a written agreement if you're investing with a partner, or starting a business with a partner. This is especially important if you're working with someone that you don't know very well.

BUY-SELL ISSUES
by Dyches Boddiford

Anytime two or more unrelated individuals own investments or a business together, they need a buy-sell agreement. Over the years, I have seen many profitable ventures fail because their owners did not anticipate there may come a time when their personal situations might change and how that may affect their co-owner(s).

Ideally, in the process of structuring the enterprise, you and your co-owners talk through important issues that could arise. This is always best before problems come up, and while you all are still speaking to each other! More than once, I have seen the simple process of discussion of these points bring up differences of opinion that would have sunk the enterprise if they had come up later. You want to know about any differences up front.

The discussions should include what would happen if
an owner:

• Goes bankrupt or is forced to liquidate
• Dies
• Becomes incapacitated
• Doesn’t carry his/her weight (very common)
• Doesn’t make required additional contributions
• Simply decides they want out (or you want them out!)
• Divorce where the spouse may get an interest

These are by no means the only possibilities, but they are common. Add any to the list that come up in the discussion. Jot down what the consensus is for each situation. A good note taker here is a real plus.

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My comments: It is incredibly frustrating to be involved in a group project with an individual that does not pull his/her weight. When I was in college, I always hated group projects. Why? Because invariably certain members of the group did all the work, while other members slacked off and tried to avoid work.

What was particularly frustrating was that the students who did no work at all (or very little work) reaped the same rewards as the students who worked very hard. To me, that was exceedingly unfair. People who work hard should reap the rewards, while people who slack off should not. It annoyed me that someone who did very little work should receive an A+ on a project, simply because he had group members who were hard workers.

The same can happen in business. If you're in business with a partner who is not pulling his weight, then that person is feeding off you, and your efforts. Partnerships (and group projects) can be rewarding and enjoyable if all members pull their weight and contribute equally.

Unequal contributions and differences in worth ethic can leave you feeling taken advantage of. Get an agreement in writing that states what tasks each partner will be responsible for accomplishing. Make sure tasks/roles are clearly defined so that each person contributes equally.

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Continuing with Dyches Boddiford's newsletter…

I am aware of no state that provides default statute provisions for buy-sell issues among co-owners—-this has to be done with a written agreement between the owners.

A proper buy-sell agreement not only describes when, to whom and how an interest will be sold, but for how much as well. The provisions spell out how interests will be valued when they are sold, so as to avoid disagreements. They could be valued using:

• book value
• fair market value, or
• a formula approach

If there only two owners, the “pie method” can be used. The basic idea is that one person cuts the pie (names a price for her share of the assets/business), and the other person chooses which of the two pieces he wants (whether he want to buy or sell at that price). If neither wants to buy each other out, the property or business is offered for sale to outside parties and proceeds split.

Once you have a consensus on the issues, take your notes to a good attorney to draft a formal buy-sell agreement. The few hundred dollars will be well worth it. If, for some reason, the co-owners do not feel they can pay an attorney at this time, at least draft your own written buy-sell agreement and have all owners sign it. It will at least commit everyone to the terms.

If you already have investments or a business with unrelated owners (maybe even with related owners in some cases) and do not have a buy-sell agreement, block out some time to have these discussions ASAP. Get an agreement in writing before a problem arises! There is a good chance that you will be glad you did.

Good investing until next time,

Dyches Boddiford