Getting the Best from Business Agreements

Robert Stone, Senior Client Services Principal in the Miami office of Kaufman, Rossin & Co, contributed this article to BusinessNewsDaily’s Expert Voices: Op-Ed & Insights.

Signing a business agreement is usually a time for celebration. The alliance has been thoroughly discussed; you understand the value each party contributes. But in the process of creating an exciting new venture, entrepreneurs often fail to examine the specifics of the agreement. The details in business agreements don’t seem important … until they are! When a promising business idea turns out to have a lot less promise or one party just wants to move on, you’ll need both flexibility and formality to get a “business divorce.” To understand the economic and tax consequences of a legal agreement, make sure to review the document with your accountant as well as your attorney. Consider some what-if scenarios and the consequences.

Language: Imagine your widget manufacturing company enters into a partnership with someone who owns his own corporation, a distribution company. The agreement says that his corporation pays all expenses, and then allocates expenses “on a reasonable basis” to the partnership. That phrase may seem sufficient — until you see you’re being allocated his entire storage expense, bookkeeping costs and even costs for non-widget inventory. Is the agreement clear enough to resolve this dispute?

Partnership rights and responsibilities: What if your partner wants to bring someone else into the business? Do you have the right to approve the new partner? What is the value of the shares she will own? Can shares be gifted, or must she invest? Whose shares are diluted in such a transaction? Your attorney can draft terms for expanding the partnership, but it’s best to have an accountant show you how a few scenarios would impact you economically.

Tax implications during the business: What if, over years in business together, your partner takes more distributions from the business? One year he needed a special distribution for college tuition; later he needed funds to settle his divorce. What are the annual tax implications for each of you?

Tax implications after the business: What are the tax implications when the business is dissolved? Depending on the type of entity chosen at the start, it might be taxed at regular rates or capital gains rates. Which do you prefer? Which does your business agreement dictate?

Rights at dissolution: Valuing the business on dissolution is another area that can be controversial. Include valuation methodologies in the agreement so it’s more objective than subjective. You don’t want to have dueling experts on dissolution. You may want to incorporate a penalty for the party who initiates the dissolution. And if there has to be an appraisal of the business who pays? Who pays for the legal fees?

Rights at sale or death: What if your partner wants to sell and you don’t? Does your agreement give you the right of first refusal? What if he dies? Does the agreement include your right to buy out his estate, or must you stay in business with his heirs?

Get the right advice up front.

Don’t just sign a standard business agreement with your buddy and think you’ve got a solid deal. Enlist both legal and accounting professionals to help make sure it’s the right deal for all parties involved. A well-constructed agreement means fewer surprises, less conflict and less expense.

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Robert Stone, CPA, ABV, CFF, is a Senior Client Services Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.