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A company created by two or more individuals is often like a new marriage—the newlyweds look forward to a successful and happy future together until death (or sale of the business and retirement to the Caribbean) do they part. No one wants to think about the possibility of divorce. It is hard to even imagine it happening. But not considering the possibility of divorce can lead to a nightmare that in many cases could have been avoided.

For example, one all too common scenario is the Three Musketeers—three friends go into business together and in accordance with the Musketeers’ motto, “all for one and one for all,” they split up ownership and control of the company equally. Then the nightmare begins. The company needs cash to operate, but only two friends are willing or able to put in money. The other friend not only does not contribute funding but does not work as hard as the other two, or turns out to be incompetent. The third friend finally leaves, still owning one-third of the company; one-third of any value that the first two friends create in the company therefore will belong to the third friend who has made no real contribution to the company.

The two friends can mitigate this result if they can agree with the third friend on a price to buy out his or her interest and find the money to pay that price. Even so, paying the third friend any amount is typically painful, and the (now probably former) friends may not be able to agree on a price.

This nightmare can be avoided. For example, the friends could have required that each contribute an equal amount of cash to the company as initial financing, or they could have agreed that the ownership interests would vest over several years.

Some nightmares occur even though the original business partners never have a disagreement. For example, two partners may start a company and build a valuable business. One then dies, and the deceased owner’s children inherit his or her stock. The children do not work in the business, and the business does not pay dividends. The surviving owner wants to continue to reinvest the profits of the business back into the company to grow it further. If the children have control of the company, they may decide to sell the business to get value out of it. If the children do not have control, they may sue the surviving owner to try to force a buyout or sale or liquidation of the company in order to get value out of the company. The parties may or may not be able to strike a deal. The situation could have been a lot easier to handle if the original owners had put in place life insurance on themselves to fund a buyout of their stock in the event of death.

Prior planning cannot guarantee a harmonious future for business partners, and some business partners never have problems with each other. Failing to consider and plan for a potential breakup, however, too often leads to an expensive and painful divorce that might have been avoided.