In Jim Collins important book, “Good to Great”, he discussed the critical importance of getting the RIGHT people in the right positions on the (company management) “bus”. This example illustrates the hazards of going too far into the start of a transaction based on “cocktail talk”, meaning generalities, pleasantries, and a handshake without any professional transactional advice.
Situation
Two mature women in a health-related personal growth field had a multilevel relationship as friends and professionals. Woman A had a valuable certification to provide a higher level of professional service. Woman B aspired to become certified in the narrow specialty. Casual discussions of starting a business together turned serious to the point that Woman A invited Woman B to join in creating a business in the specialty. The planning became serious and included year by year projections of professional and revenue development. It even included speculation on partner titles and compensation as the certification process was completed and business grew.
To fund the start-up, Woman A asked Woman B to lend her $50,000.00 in return for Woman A signing a Loan Agreement and promising to pay the funds over time. The money was lent on an unsecured basis and Woman A opened an office/studio. Then without notifying Woman B, Woman A abruptly closed the office to join up with other acquaintances to pursue a more attractive opportunity in a related field.
Woman B had not had the benefit of counsel throughout despite signing the legal agreement and lending the money. She then sought my advice. Investigation revealed the Loan Agreement prepared by an attorney Woman A knew was totally inadequate for the project.
- The agreement was vague
- It never mentioned the business purpose of the loan
- There was no promissory note to accompany a properly written Loan Agreement.
My communications to Woman A on Woman B’s behalf were rebuffed and Woman A refused to sign proper loan documents I prepared. The parties stopped speaking to one another. Then A engaged counsel.
Moral of the Story
The fatal flaw in the above is that my client failed to engage competent counsel before signing the Loan Agreement and lending the money. Without legally binding agreements, parties in such bitter disputes must pursue expensive remedies in court or via mediation or arbitration.