Friday, September 26, 2014

The 9 Dos and Don'ts of Divorcing Your Business Partner

This is a guest blog from Melanie Glickson, ESQ.

            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.

 For more information about your particular situation, contact Melanie Glickson, ESQ.

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