When starting a new venture, business owners have the drive to create something out of nothing, and they have a plan as to how that begins. That plan should always include getting business formation documents prepared, whether it be a limited partnership, a limited liability company (“LLC”) or another type of business entity. However, that vision and plan often leaves out an extremely important component: an exit strategy.
Among other things, the business formation documents should account for a number of possible situations where a business owner leaves, whether voluntarily or involuntarily. These situations include selling all or part of their interest to another owner in the business, to someone else affiliated with the business, or to someone outside of the business; protecting the business in case an owner gets divorced, or if two owners are married to each other and get divorced; protecting the business in the event of the death or disability of an owner; and many other potential situations. Failing to account for these types of situations could result in unwanted consequences ranging from difficult negotiations between existing owners to finding out that numerous heirs, with no knowledge of how the business runs, owning the majority share of the business. These situations are the 4 D’s, death, disability, divorce and divestiture.
As a business grows entrepreneurs may refine their initial vision with exit strategies in mind, but they often forget to revisit the formation and governance documents to make sure that vision is actually incorporated into the business. Accordingly, it is important for business owners to go back and review all formation documents to make sure they provide worst-case-scenario protections and clear guidance as to how ownership can be transferred in case of one or more of the 4 D’s occurs.
If you would like an attorney to review your formation documents, or would like to have those documents amended to clearly provide for exit strategies, give Mazurek, Belden, & Burke, P.C. a call at (830) 201-1187.