This is the eighth and final article in a series discussing eight bad “D”s to consider when drafting an operating agreement for an LLC.
Unfortunately, businesses do decline as market conditions shift and change. Businesses that were once vibrant and dominant (Blockbuster, Sears & Roebuck, numerous hamburger chains and retailers) are now relics of the past. Why? Because there was a decline in their business that needed to be addressed.
If market conditions change to the point where your business is no longer viable, that needs to be recognized and agreed to by all members of the LLC. Metrics should be defined in advance as to what it will take for everyone to agree that the business has declined to the point that it is no longer viable.
One of the easiest ways to track decline in a business is to know your numbers on a weekly, or at least monthly, basis relative to the amount of new matters, projects, deals, or opportunities coming in and how much money is coming in versus going out. For example, if you are a house-flipping enterprise that used to get 40 leads a month of people interested in selling their houses, and you closed 3 deals a month, but now you are down to 5 leads a month and only close 1 deal every other month, then your business is in serious decline. You need to adjust accordingly.
Make sure your operating agreement spells out what to do in case of declining business. An operating agreement will usually contain a section regarding winding up the LLC in which it is agreed that the person who continues to run the company during the process of winding it up will get paid. Make sure there is enough money on hand to continue to pay that person who is left with the responsibility of shutting down the operations and bringing everything to a close (closing out bank accounts, reconciling the books, submitting the final tax returns, and distributing whatever money is left). All too often, businesses wait too long and there is no money left to do this process, so no one wants to take on the responsibility because they will not be compensated for doing it. This is a sign of failure to plan ahead for what may be inevitable.