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An ounce of prevention: Ask and answer the tough questions before closing the deal

By ,
Stuart L. Pachman of Brach Eichler LLC.
Stuart L. Pachman of Brach Eichler LLC.

After a four-day trial among warring business associates, the judge began his lengthy opinion with the following lament.

“This case speaks volumes to the inevitable landing in the courtroom when the parties, who decided to enter into significant real estate and business investments, failed to seek counsel and have them finalize their relationship with appropriate documents.”

This was not the first judge to give voice to this common failing, nor will it be the last.  Time and time again, individuals who enter into business with others without competent advice end up in trouble, in court, and in debt.  Entrepreneurs with stars in their eyes see only a rosy future and not the pitfalls and hurdles which can be avoided by advance discussion and planning.

Here are some of the questions that should be asked and decided at the outset.  First, should an artificial entity be formed to protect against personal liability which would place at risk the participants’ personal fortunes?  (The answer virtually always is “yes.”)  What form should the entity take (e.g., corporation, limited liability company, something else) and in what state should it be formed?

How are the parties going to make major and operational decisions, or stated differently, who’s the boss? In what percentages are profits to be divided? What is to be the tax allocation not only of profits but also losses? Should there be a preference on the order of distributions?

What is most important (what judges repeatedly look for) is a clear understanding of what each participant expects from the others, and what each understands his or her commitment to be.

We don’t like to think about death, but it can come to anyone at any time.  What will be the consequences if you or one of your “partners” dies or becomes disabled?  What if discord arises among you?

When everyone understands the deal, it should be reduced to writing to avoid misunderstandings and subsequent different and varied recollections.

Getting the ship outfitted correctly at the outset is substantially less costly than the monetary toll inherent in later litigation, not to mention the wasted time and energy involved, the angst of uncertainty, and the exasperation of an overburdened judge who will likely view the situation quite differently from what you expected.

Stuart L. Pachman is a member at Brach Eichler LLC, a law firm in Roseland.  He can be reached at 973-403-3133 or spachman@bracheichler.com. Visit www.bracheichler.com.

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