The easiest and most cautious approach to business deals with friends and family is to avoid them altogether. However, a more practical approach would be to document them cost effectively through a Houston business attorney. Here are five simple reasons why you should get a business attorney to documents your friends and family transaction:
- The first reason to seek legal counsel for a friends and family deal is: memories fade. Friends and family deals are usually very informal and arise at a time of unique opportunity, stress and need. People under stress or financial duress do not always think clearly or will agree to things they ordinarily would not. When conditions change, the person who needed the loan or investment capital often times does not remember the events clearly and will deny making such an attractive offer.
- The second reason to pursue legal assistance for a friends and family transaction is: people and circumstances change. People age, divorce, move, and have children. People become wealthy and fall on hard times. The person who you enter into a business deal with in 2015 may not necessarily have the same values, priorities or character in 2023. What if you loaned your single brother $50,000 to start a new business in 2015 in exchange for 25% of the business, but he marries a characterless women in 2018. Then, let’s say that by 2019, you stop speaking to your brother and he sells his company 5 years later for $20 million. Your entitlement to $5 million of the sale proceeds will likely not get paid willingly if your brother’s wife threatens to divorce him and take the children. In these times, it would be nice to have a contract prepared by a business lawyer.
- Reason #3 to get a lawyer for a friends and family deal: people get sick and/or die. You may trust your friend, but do you trust their spouse, children or the executor of their estate to honor your handshake deal? Why risk it?
- The fourth reason to seek legal counsel is that the law requires certain contracts to be in writing. Contracts involving real estate, sale of goods over a certain amount of money, and contracts that cannot be fully performed within a year must be in writing to be enforceable. There are many caveats to this rule and business lawyers are specially trained to identify and deal with the issues involved.
- The final reason to get an attorney to document your informal business transaction is that fiduciary duties may apply to one or both of you. Fiduciary duties are obligations that arise under the law because of a long history or relationship of trust and confidence. If such a facts exist, the trusted person must fully disclose all facts regarding a transaction, must put the other person’s interests before their own, and essentially ensure that the other person is not harmed financially by the transaction. Getting an attorney for the transaction will help the fiduciary (person who is trusted) avoid additional liability in the future if something goes wrong.
Conventional “wisdom” assumes that insisting on a written agreement will offend the other person that it will create unnecessary costs and/or that family or friends are trustworthy. Each of these assumptions creates unnecessary risk for you. No one should be offended by your desire to protect yourself or that you care enough about your relationship with them to ensure there are no misunderstandings in the future.
If you decide to loan money or enter into a business transaction with a friend or family member, it is important to have a written document with all the terms of the agreement. Having it in writing is the best way to protect yourself. The cost of writing and executing a written agreement is the price of certainty and peace of mind. If you are thinking of entering into a transaction with a friend or family member, you should contact the Vargo Law Firm and discuss your plans with one of our attorneys. Don’t let the other person guilt or talk you into doing the deal only with a handshake. A handshake is not enough to protect you.
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