2017 Q2 Business Planning

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The curse of the handshake deal. Few people enter into a new business or transaction expecting to lose money. However, it happens more often than not because the parties have not thought through common issues that can come up and agreed how to resolve them. Afterwards, we hear: “I should have called you before…” “I wasn’t worried about it because…” “I thought she was good for it.” “We didn’t want to spend the money on legal fees.” Even worse is the dreaded “We just never got around to signing it.” All indications that the deal was cursed.

A recent case illustrates the dark cloud hanging over deals with unsigned documents. Five hunting friends each shook hands on a deal to equally acquire land that needed to close by year-end. A new LLC was formed and four out of the five friends transferred their money. The fifth friend only transferred $100,000 of the $500,000 committed, saying he would put the balance in shortly after the 1st of the year, which never happened. Facing a shortfall at closing, the LLC borrowed the money to close the transaction on time. An operating agreement was circulated, but the friend who didn’t pay didn’t sign it. Surprised? Later, the property was sold at a substantial profit and the defaulting member sued for his money back.

These facts raise some tough issues regarding the defaulting friend’s interest in the entity:

1. Was he a 20% member of the LLC?
2. Was the operating agreement he did not sign binding against him?
3. If he was not a member and the operating agreement was not valid, was he entitled to his money back?

The Court ultimately determined that the agreement was valid and the defaulting friend was not entitled to anything given the facts. However the former friends battled in court for six years and the decision could have easily gone the other way. The cursed result could have been completely avoided by obtaining all signatures on the operating agreement in advance or at least having the defaulting member sign a promissory note to the LLC for the balance owed. Let us advise you with respect to your new business ventures before you transfer the money. It may save you from the curse of the handshake deal.

By |2018-08-11T16:47:55+00:00April 20th, 2017|Past Newsletters, Business Services|Comments Off on 2017 Q2 Business Planning