The
dissolution of a business
can be just as harrowing as divorcing your spouse. Business partners split up for any number of
reasons. Sometimes one partner is not
producing. This might be due to personal
troubles, like addiction to drugs or alcohol, which leads a breakdown in the
business relationship. Sometimes one
partner becomes embroiled in an inappropriate romantic relationship with an
employee, or otherwise engages in unprofessional behavior that places the
practice at risk. Sometimes financial wrongdoing
(or perceived financial wrongdoing) is involved. And from time to time, partners split up with
each other simply because they have gotten on each other’s nerves over the
years, with minor resentments building to excessive levels – again, not unlike many
marriages.
If you find yourself in a situation
where you feel you need to divorce your business partner, consider the
following “dos” and “don’ts” to mitigate the cost and the stress associated
with dissolution.
1. DO consult with a business attorney
once you decide to ditch your partner.
It can be challenging to
effectuate a dissolution:
you want to keep it quick and simple – all the while paying attention to the
details. Add to this, managing the emotional and interpersonal stress associated
with the separation. Consult with a
business attorney early. You will be so glad
you did.
A good business
lawyer can help you clarify the steps to wind up the business and dissolve.
She should also be able to advise you
about restructuring the business after dissolution - if you want to continue with
the business afterwards. If things become contentious, a litigator will
probably need to get involved. On the
other hand, if you read, understand and act on the advice in this article, it
might not have come to that. While it is
prudent to seek advice and
counsel from an attorney at the beginning of the process, in most cases
actually involving the court system should be seen
as a last resort.
Each state has its own procedures
for terminating a business entity, depending on the type of entity (LLC,
corporation, general partnership, etc.).
The partnership agreement or operating agreement controls these terms,
but if there is no agreement, or the agreement does not address dissolution,
then the default rules provided in the state statute apply. There are rules pertaining to voluntary
dissolution (where the members consent) as well as court-ordered
dissolution. For voluntary dissolution,
these procedures are not complicated, but there are certain necessary steps
that need to be followed depending on the state and the type of entity. For example, in Maryland, an LLC’s creditors
must be provided with 19 days’ advance notice of dissolution. You can consult your state’s business database
to learn more about these procedures.
2. DO have an agreement in place that addresses
dissolution.
A good partnership agreement or
operating agreement will address dissolution, like a prenuptial agreement in a
marriage. While not required by law, it
can be risky to conduct business without one.
The agreement can provide a set of steps to end the relationship and
repurchase the interest of a partner who is not performing or is unsatisfactory
for reasons the agreement provides (i.e.,
conviction of a crime, loss of license, sleeping with the receptionist, a
burgeoning addiction to mouthwash, or any other specified conduct).
If you never had
an agreement with your partner, or if your agreement does not address
dissolution, try to negotiate the terms of dissolution together with your
partner. Your attorney will
memorialize these terms
into a formal agreement in which you and your partner release each other from
any claim relating to dissolution.
If you are unsure
about whether you want to separate with your partner, but you do not have any
agreement governing your business relationship, have one drafted immediately. While it’s better to draft these agreements
in the beginning of the business relationship, it is never too late, until it
is too late. Simply advise your partner
that you heard horror stories about practices that had no agreement, or say you
are trying to boost the level of professionalism of the practice in general.
3. DO elicit assistance from
third-parties.
Rather than
arguing with your partner back and forth or losing sleep over the details of
dissolution, utilize third-parties who are well-versed in issues surrounding
dissolutions, and who can look at the situation without emotion. Examples include attorneys, accountants,
appraisers and mediators. As an example,
don’t tear your hair out trying to determine a range of value for the business
– consult with your accountant.
If you are unable
to come to mutually agreeable terms with your partner regarding dissolution, a
neutral third-party in the form of a private mediator can cut short legal fees
and resolve the matter quickly. Parties
typically fail to take advantage of mediation early enough, and could have
saved significant legal fees and stress had they chosen to mediate early in the
dispute. Mediation sessions can often be
scheduled at the last minute with a mediator that is mutually agreeable to both
sides. Many mediators are retired judges. They are very knowledgeable and experienced
at defusing tension and arriving at a settlement. Your attorney can fill you in on the
background of the potential mediators. The
mediator is paid an hourly rate that the parties often agree to split, or to
count as a business expense associated with winding up. The mediator puts the parties in different
rooms with his or her attorney and goes back and forth to discuss the matter privately
with each party to try to resolve the dispute.
Unlike arbitration, which is binding according to what the arbitrator
decides, mediation yields a resolution only if the parties agree. Mediation is confidential and the
communications that take place cannot be used in litigation, in the event the
case does not resolve and the parties move forward with a suit.
If you are unable
to negotiate the terms of dissolution directly or through a mediator, or
through counsel, the dissolution will need to occur through the court
system. This should be seen as a last
resort, as it is costly, public, and
often involves mudslinging by both parties.
4. DO review leases, contracts,
and loan agreements to see how dissolution will affect them.
Before you discuss a business divorce
with your partner, you should review any leases, loan agreements, and contracts
to determine the impact of dissolution.
Often, the business is still bound by the contract or lease through the
end of the contract period or lease period, regardless of dissolution. Sometimes you can negotiate with your
landlord, but these are all subjects you need to discuss with your
partner. You should approach your
partner about dissolution having reviewed these documents in advance.
5. DO try to be direct and
communicate with your partner about separating as soon as you decide.
Once you decide to separate from your
partner, sit down with your partner and have an honest, direct discussion. Be tactful but truthful. Allow time for the news to sink in and then
address the details.
The break-up
discussion is difficult, but important to conduct. Consider the following example of how
complicated things can get, very quickly, in a business breakup when the lines
of communication are not left open. One
particular individual decided to break up with her partner. She was so worried about her partner’s
reaction that she never actually sat down and communicated her desire to
separate. Instead, over a weekend, she
unilaterally moved half of the office property into storage and transferred
half of the money out of the bank accounts.
On Monday morning, the partner walked into the office to find half of
the furniture gone, half of the money gone from the accounts, and a letter on
her desk announcing the split, asking for consent to dissolve, and threatening
to seek judicial dissolution of the business if she did not give consent. The surprised partner called the police and tried
to have her partner arrested for embezzlement.
Then, she (the surprised partner) hired a lawyer who threatened to file
a temporary restraining order against the unilateral-acting partner, preventing
her from earning any income until she returned the office furniture and the
money. Both parties threatened to file
breach of fiduciary duty claims against each other. Both the tension and the attorney’s fees
escalated at breakneck speed.
6.
DON’T communicate directly with your partner once lawyers are involved.
While
open, honest, direct communication is key at the beginning stages of a
dissolution, if the split becomes acrimonious, both sides need to communicate
only through counsel. It is not unusual
for the attorneys to pass along telephone messages and mail on behalf of their
client, to the other business partner, so that the parties do not have to
communicate directly. While this may
seem unnecessary and juvenile, for various reasons, adverse parties should not
be communicating except through counsel.
Moreover, if the relationship has truly devolved, even communications
about ordinary office
banalities
while the parties are still in business together can lead to knock-down, drag
out arguments.
7. DON’T
allow personal feelings to draw out the process.
At the end of the day, you don’t
want to wind up in a situation where you are paying your lawyers large sums to
fight about who gets the copier and who gets the office chairs. Just like when a marriage ends, distribution
of the assets can be wrought with the emotion over the breakup. Don’t succumb. Tell your attorney what you are willing to
compromise about and let her do the negotiating. You can give your attorney the authority to
negotiate on your behalf without necessarily giving you a detailed play-by-play
of every detail and every discussion.
You, not your lawyer, will have ultimate approval authority over any
agreement proposed. Take a step back,
and don’t get lost in the details.
8. DON’T
lose sight of the bigger picture.
When
you are negotiating the terms of dissolution with your partner, whether it is
directly, through counsel, or through mediation, keep in mind that it is
usually worth it to give up something in exchange for peace of mind. Orient your frame of mind on your next
chapter.
9. DON’T
overthink it.
You should give careful
consideration to the prospect of separating from your business partner, but
don’t obsess. As painful as it can be to
split with your partner, if your gut tells you it’s necessary, you will
probably be better off in the long run.
People torture themselves for years wondering “should I, or shouldn’t
I?” It’s better to act quickly and move
forward toward the goal of achieving business success.
