It’s Officially Mid-Year: The Checkup Every Business Owner Needs | Carlile Patchen & Murphy LLP

By Drew Pinta | Carlile Patchen & Murphy LLP

Moving into the second half of the year means that many business owners are reviewing financial statements, evaluating growth projections, and planning for Q3 and Q4, and beyond. Yet one of the most important reviews often goes overlooked entirely: a legal checkup.

Recent economic indicators, like the NFIB Small Business Optimism Index, show that while optimism continues to ebb and flow, as economic uncertainty persists. Costs for everyday necessities continue to rise, workforce challenges remain, and many businesses are operating in an environment where long-term planning feels increasingly difficult.

The reality is that economic uncertainty can expose legal gaps that have existed all along. For closely held and family-owned businesses, those gaps can become especially costly.

When Business is Good, Weaknesses Can Stay Hidden

Many successful businesses operate for years without revisiting foundational documents or contingency plans. Day-to-day operations take priority, and typically, the legal housekeeping falls to the bottom of the to-do list. It’s in uncertain times that vulnerabilities can become exposed.

Maybe a business owner discovers that an operating agreement no longer reflects the company’s ownership structure. A partnership may rely on verbal understandings that have never been documented. For example, contracts could contain outdated terms that no longer align with the way that the business is currently running.

During periods of economic uncertainty, business owners could come to the realization that they have never established a buyout structure if one owner desires to leave the company. Furthermore, they may not have implemented any language that addresses what occurs when the company needs more capital.

The Cost of Waiting Until a Crisis

Business owners often assume that they can address legal planning when a problem arises, but unfortunately, many of the most important protections need to be established before they are needed.

Consider these questions:

• What would happen if an owner becomes incapacitated?
• Who has the authority to make critical decisions?
• How would ownership transfer if a partner were to die unexpectedly?
• What would happen if a key employee leaves?
• How would the business continue during a prolonged disruption?

Without clear answers, uncertainty can quickly turn into conflict.

Oftentimes, business relationships that developed when times were good can be tested and even collapse in a time of crisis. Business partners who were once on the same page could later find themselves in stark disagreement about the direction of the business without any established procedure to navigate these challenges.

Five Areas Every Business Should Review Mid-Year

While every company is different, there are several areas that closely held and family-owned businesses should revisit regularly.

1. Ownership and Governance Documents

Operating agreements, shareholder agreements, and partnership agreements should accurately reflect the current state of the business. Changes in ownership, responsibilities, or long-term goals can often occur without updates to governing documents, leaving major gaps in the business.

Governing documents should be updated with accurate ownership tables, along wit hclear language about company management. Furthermore, voting rights and formalities should be reviewed and adhered to in order to comply with the agreement.

2. Buy-Sell Agreements

A buy-sell agreement can provide a roadmap for ownership transitions following retirement, disability, death, or departure from the business. Without one, disputes can arise at exactly the moment stability is most important.

Some of the biggest disputes that arise come as a result of failing to outline the process for buying or selling one’s share of the business.

3. Succession Plans

Many owners assume succession planning is only relevant near retirement. In reality, succession planning is contingency planning. It helps ensure that the business can continue running regardless of unexpected circumstances.

In addition to establishing buy-sell provisions, business owners can have conversations with family members or key employees who may be a good fit to continue the business in their stead at some point in the future, and what that transition may look like.

4. Key Contracts

Vendor agreements, customer contracts, employment agreements, and leases should be reviewed periodically to ensure that they still align with current business needs and risks. Economic shifts often change how these agreements function in practice.

For example, a lease that aligned with the market several years ago may not reflect current trends and re–negotiation may become favorable.

5. Estate and Business Planning Alignment

For family-owned businesses in particular, business planning and personal estate planning should work together. Business owners often spend years building value without ensuring that ownership, succession, and estate planning strategies are aligned.

It is important to involve your estate planner in conversations about the succession of your business and the provisions regarding how it might be handled in death or incapacity.

Mid-Year is the Right Time to Ask Difficult Questions

This time of year offers a natural opportunity to step back from daily operations and evaluate whether the business is prepared for both opportunities and challenges ahead.

A legal review does not necessarily mean major changes are needed. In many cases, it simply confirms that existing plans remain appropriate.

But when gaps do exist, identifying them early is far less expensive than discovering them during a crisis.