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Local lawyer addresses business partnership pitfalls

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Some of the hardest business conversations are between family and friends, according to Garden City attorney, George Merrits of George Merritts Law Firm, who held a workshop on starting a business with partners in February and the second one March 20. The interactive seminar also included discussion of common pitfalls businesses make with buy-sell agreements, legally binding agreements between co-owners of a business that governs situations if a co-owner dies, forced to leave the business, or chooses to leave.

“I have represented hundreds of businesses from Montauk to Manhattan, and I say 90 percent of them have no contracts in writing,” Merrits said.

Merritts shared that the first pitfall of a buy-sell agreement is a business not having one, to begin with. He said this agreement is similar to a prenuptial agreement because it contemplates things that need to be hammered out when in business with a partner.

The two main reasons, Merritts said, businesses do not have any agreements in writing is because people may have gone into partnerships with family members or friends, but also the cost of a buy-sell agreement can get pricey.

“It’s an expensive service to provide and it does cost several thousands of dollars to put together properly,” he said.

During the presentation, he explained that the lack of proper paperwork and agreements have left some of his clients dealing with a business and marital divorce — which could cost ten times more than a martial divorce than putting together an agreement.

Freeporter William Hager from Freeport said he has owned a business but has never needed a buy-sell agreement because he did not have any partners. However, he and his brother-in-law are thinking of going into business together to open up a consignment shop upstate New York. He admits he had a passing conversation about a buy-sell agreement with his brother-in-law, but after attending the workshop, he is seriously considering implementing the proper paperwork.

Other pitfalls in partnerships include not addressing the “what if’s,” Merritts said. Meaning that “what if’s” include discussions on what happens to the business when a partner dies, gets a marital divorce, has to leave because of poor performance or becomes disabled. When there’s no buy-sell agreement these “what if” issues pose additional disputes amongst partners.

Additional pitfalls Merritts thinks business partners should address include: the question of unanimous consent, the updating of proper paperwork, failure to evaluate business plans and unable to fairly determine to buy out agreements in the event the business ends.

He said funding the buy-out could be another issue business owners face. It’s often overlooked or not carefully thought through when partners realize they don’t have enough money to buy the other out.

“Don’t think about the buy-out after it’s happened,” Merritts said. “Think about it way upfront, when putting the agreement together.”