Harford Business Ledger: April 2005

The goal of this column is to make you aware of some of the issues and problems that I frequently encounter in the course of representing business owners, in the hope of helping you avoid the same mistakes! The most simple and most ignored principle of business is -- "get it in writing."

It's easy to see how this problem develops. You are very busy. You probably spend your day moving from one fire to the next. But (to continue this metaphor) it is critically important to make sure that each time you leave a fire you have completely extinguished it, and have documented that fact. Otherwise, once you leave it and move on to the next, a fire left behind could one day become a roaring inferno.

It comes down to risk management. If you are too busy to document every act, understanding and agreement you enter into during the course of a day, you must rely on being able to identify which of the smoldering fires you leave behind will burn themselves out -- and which are likely to reignite. One way to manage that risk is to do business only with people in whom you have implicit trust and who are good to their word. This decreases, but does not eliminate, the number of instances where you should "get it in writing" -- so if there is any doubt, always err on the side of a written confirmation. It never hurts to throw extra water on a smoldering fire!

Once you have determined whether or not an understanding must be documented, the next issue becomes how best to perform the documentation -- what KIND of writing to "get it in," so to speak. Again, this is a judgment call and a risk management issue. Confirmations can range from e-mails, letters, counter-signed letters, simple agreements, complex agreements and agreements which rise to the level of requiring legal assistance and tax and accounting consultation.

Once again, it is best to err on the side of establishing a higher level of documentation, although many people balk at doing that. In my practice, I find that busy people are reluctant to have lawyers or other professionals properly memorializing agreements in writing. Well, it might sound self-serving for a lawyer to say it, but the truth is that a few hours of professional time spent properly memorializing an agreement at its beginning are dramatically less expensive than years of litigation trying to interpret an unwritten (or poorly written!) understanding. The old adage -- "Pay me now or pay me later" -- in this instance really becomes: "Pay me now -- or pay a lot more later."

The area in which the failure to reduce an agreement to writing creates the most problem and the greatest likelihood of litigation occurs in any business owned by more than one person -- even by siblings or by a husband and wife. The failure to properly document ownership interests, management responsibilities, and disposition on death, disability, retirement or termination, is a prescription for disaster. The disaster is often compounded by the involvement of family members and the disintegration of previously amicable relationships.

One well-known example in the sports world is the case of the New York Giants NFL Franchise. Owned for generations by the Mara family, the death of the patriarch of the family left the team in the hands of his two sons. No agreement was entered into between the brothers -- they got along. Then one brother died and left his interest to his only son, the nephew of the other owner. But the nephew and the uncle did not get along. Since both men had equal ownership interests, unless a decision was mutually agreeable, no decision could be made. Battles ensued: players went unsigned, team performance floundered, the franchise plummeted in value. The deterioration continued for many years until the League, using the threat of franchise forfeiture, forced the owners to hire a third party "tie-breaker" by whose decisions both parties agreed to be bound -- with no recourse to instant replay review! It was a close call -- one of the greatest franchises in NFL history came within inches of its demise because the appropriate agreements were not in place to allow the team to be properly managed.

In conclusion, whether your business is the New York Giants or a curbside lemonade stand, any joint enterprise should be formally documented and every potential difficulty anticipated and addressed. For limited liability companies, this is accomplished through an operating agreement. For corporations, the vehicle is a buy-sell agreement. Partnerships utilize partnership agreements. Whatever the form, whenever more than one person is involved in a business venture, it is foolish not to have as many aspects of that relationship agreed upon as possible.

It sounds simple. You hear it all the time. But nothing wreaks more havoc or costs more money than the failure to properly document in advance a business understanding or a business relationship. Pay me now -- or pay a lot more later. Get it in writing!