What Is a Business Pre-Nup?

A business pre-nup is an agreement between the business owners concerning how they will set up and run the business.  It typically deals with topics such as: 1) what each owner will contribute to the business at start-up, 2) each owner’s title and area of responsibility in the business, 3) how to handle funding the business, 4) what happens if an owner dies or becomes disabled, 5) what happens if additional owners are brought in, 6) what happens if an owner wants to leave the business, and 7) what happens if the business is sold or is liquidated.

The exact name of a business pre-nup will vary with the form of the business.  It may be called a partnership agreement, an operating agreement, an LLC agreement, a shareholders’ or stockholders’ agreement, or a buy-sell agreement.

Advantages of a Business Pre-Nup

“But we get along so well, I’m sure we’ll figure it out.” “Why do we need to define our relationship?” “I’m sure we’re going to be successful. Why do we need to think about negative things?” “We don’t need no stinkin’ paper!”  These are all things you may hear engaged couples say.  But prospective business partners say the same things.  The same optimism and euphoria that an engaged couple feels at the start of their marriage is also present when people start a business together.  So why interrupt all of these good feelings to prepare an agreement?

 1. Planning for Success

Like pre-marital counseling, preparing a business pre-nup requires the business owners to think about how to deal with the various steps of starting and running a business, including some of the day-to-day aspects that may have been glossed over during the “courtship” phase of the relationship.  For example, will all of the owners be involved in all phases of the business, or will each be in charge of a certain area?  Will all of the owners have to agree on every decision, or are there certain decisions that an owner can make without needing approval by the other owners? If the business needs more money, will all of the owners have to contribute?  What if one or more owners don’t contribute?  These issues may not be as interesting as deciding how to divide all the money that the business is sure to make, but working them out is essential to the smooth operation of the business.  It is better to work them out before a crisis arises, when stress and emotions may keep the owners from thinking clearly.  Remember the old quote, sometimes attributed to Benjamin Franklin: “If you fail to plan, you are planning to fail!”

 2. Protecting Your Investment

The business owners will be investing significant time and money to start the business.  It only makes sense to decide how to protect that investment if the unexpected happens.  For example, what if one of the owners dies?  Will the deceased owner’s family take over that part of the business?  Will the other owner(s) be required or have the option to buy out the deceased owner’s share of the business?  How will any buyout be funded?  Again, it is better to think about these issues before the crisis hits.  Some possible protections, such as insurance, need to be in place before the event occurs.

 3. A Different Perspective on Your Business Partner

Observing how each owner acts in the course of preparing a business pre-nup may provide valuable clues about how that owner will act in running the business.  This may reinforce the owners’ decision to start the business or, possibly, lead them to rethink their decision.  If so, it’s better that this occur before the owners invest still more time and money.

Upcoming Articles

Future articles in this series will discuss, in more detail, the following parts of a business pre-nup:

• Part 2:  Money In
• Part 3:  Money Out
• Part 4:  Running the Business
• Part 5  The Big Picture – Growing the Business
• Part 6:  Disaster Planning
• Part 7:  Exit Strategies

Disclaimer:  The information in this article is not, nor is it intended to be, legal advice. The law changes frequently and varies from jurisdiction to jurisdiction.  You should consult an attorney for advice regarding your particular situation.
 

In KVL Audio Visual Services v. Hackworth (New Jersey Superior Court, Appellate Division, January 15, 2010), the employer, KVL, contracted with a hotel (“Hotel X”) to provide audio visual services for banquet and conference events at Hotel X. KVL hired Michael Hackworth as its on-site audio-video manager at Hotel X. KVL had a noncompete agreement with Hackworth which prohibited Hackworth from “accepting employment by or rendering services to any other business competing with KVL within a fifty mile radius of [KVL’s location], for a period of one year.”

KVL’s contract with Hotel X expired. A few weeks later, Hackworth resigned from KVL following unsuccessful attempts to negotiate a salary increase. Less than one month after he resigned, Hotel X hired Hackworth as its in-house audio-video manager, performing the same job at Hotel X that Hackworth had performed for KVL (but for a much higher salary). KVL sued Hackworth for violating his noncompete agreement.

The court decided that Hackworth did not violate KVL’s noncompete agreement. Because noncompete agreements are, by nature, anti-competitive, New Jersey courts interpret them narrowly. The court will look closely at the exact words of the agreement. If those words are not ambiguous (and the agreement is otherwise reasonable), the court will enforce the agreement as written, and will not try to re-write it because one party to the agreement now claims that what the agreement says is not what that party meant.

In KVL’s case, Hackworth’s noncompete agreement prohibited Hackwork from working for “any other business competing with KVL”. The court noted that KVL described its business as providing audio-visual services for hotel meetings, conference and affairs pursuant to contracts with the hotels. Therefore, KVL’s clients were the hotels, themselves, not the hotel guests who were the end users of KVL’s services. Since Hotel X was not seeking to provide audio-visual services to other hotels, the court decided that Hotel X was not competing with KVL when Hotel X decided to hire Hackworth so Hotel X could offer audio-visual services directly to hotel guests. As a result, Hackworth did not violate his noncompete agreement when he went to work for Hotel X. According to the court, “[KVL was] simply attempting to have the court “re-write” its contract because [KVL] did not bargain for a specific clause regarding employment by [Hotel X] customers.”

The KVL case shows why, when a business wants to have a noncompete agreement with an employee, it is important for the business to think carefully about exactly what actions of the employee the business wants to prohibit. The business should then make sure that the agreement clearly states that those actions are prohibited. If KVL’s agreement with Hackworth had said that Hackworth couldn’t work for KVL customers, as well as KVL competitors, the court probably would have decided that Hackworth violated the agreement.

The laws and court decisions regarding noncompete agreements vary widely from state to state. In each state, there are many factors that affect whether a noncompete agreement will be enforced. If your business wants to have a noncompete agreement with an employee, you should consult with an attorney familiar with the laws and court decisions in your state before you enter into the agreement. Spending some money now to prepare a workable, enforceable noncompete agreement, makes it more likely that you won’t have to spend more money later in a lawsuit that you ultimately lose.

The information in this post is not, nor is it intended to be, legal advice. The law changes frequently and varies from jurisdiction to jurisdiction.  You should consult an attorney for advice regarding your particular situation.

Part of the responsibility of realtors is to educate their clients on the real estate home buying process. In northern New Jersey, Buyers and Sellers almost always have an attorney representing them on their real estate transaction. The real estate attorney should be a New Jersey Real Estate attorney because state laws differ.

Attorney Review

The signed contract is either faxed or hand delivered to the Buyer’s and Seller’s attorneys. The first day of attorney review begins when both attorneys have a copy of the signed contract. During the attorney review period, the Buyer is free to find another home and the Seller is free to find another Buyer.

Either party can walk away for any reason or for no reason at all.  Attorney review generally lasts 3 days but can be shorter; the Buyer and the Seller may agree in writing to extend the 3-day period for attorney review.

During Attorney Review

Attorneys study and review the details of the contract during attorney review and make appropriate changes.  Showings on the property may continue while the contract is in attorney review, although it should be marked as such in the Garden State multiple listing service (MLS). This contract becomes legally binding at the end of attorney review unless the attorney for the Buyer or Seller disapproves of the contract. It is as simple as that.

I am pleased to provide you with the insightful comments contained herein. Please contact me at The Humphrey Law Firm, L.L.C. for further discussion on how I might be able to assist you.