Do You Have Your Rip Cord

 Our CPA firm deals with many newly formed businesses each year.  When two or more people get together to form a business, it is almost like a boyfriend and girlfriend getting together for the first time.  They are usually fairly giddy with excitement over the new venture and look forward to the business being there forever.  However, like many human relationships, many of these unions will end in divorce and it can be painful.

I like to remind my clients that they need to be extremely diligent in building in a rip cord in case the business does not work out.  Just as in parachuting for the first time, the rip cord is designed to get you to the ground safely when things do not always work out.

In your business agreement, you need to make sure to document what will happen in the following situations:

• What happens if one of the partners becomes disabled or dies?  Will you use life insurance to take care of these situations?
• What happens if one or more of the partners goes bankrupt?
• What happens if one of the partners decides to leave the business?  Are the remaining partners required to purchase the interest?  If so, what is the price and terms and how is it determined?  What if the parties can not agree on the price, how is that resolved?
• What type of restrictions are built in to the transfer of interests?  If not handled correctly, you may end up new partner that you did not know about or want.

These are just some of  the issues that need to be built into the “rip cord” wording to make sure that it works.  Remember, in these situations it is almost always better to design the rip cord up front than to try to come up with the right one when it is too late.