Just like regular divorces, sadly most business partnerships end up in divorce. Knowing how to get through such a phase (beforehand) can help you (and the business) be set up for success!
Simply put, a business divorce is when a small, closely held business with more than one owner has a falling out between the owners. These are human beings doing human things, so all of the high school political jockeying takes place, but smart entrepreneurs can plan ahead and safeguard their businesses against these issues by getting a great partnership agreement put in place beforehand.
In order to be a Navigator, you’ve got to know the map–what is the legal and structural landscape, what is the backdrop to your circumstances? What are the pros and cons to removing a business partner from the business? The options can seem endless, and your incentives (and disincentives) will change drastically depending on how you set up your company in the first place. If you hired a lawyer to draft a solid partnership agreement, then getting a business divorce is probably easier than those businesses that did not. A good business dissolution lawyer can review all of this, your partnership agreements, the business’s assets (bank accounts and who holds the keys to it!) whether the partners are paying for personal expenses like car payments or health insurance, meals, or entertainment purchases, with the company’s money (your money?).
In my experience, the best way to go is just like a marriage divorce: the person who hires the attorney first usually finds themselves in the best position after everything is done. There are so many things that business owners can do if they know that a divorce is coming, and once those strategic moves are made, it’s very difficult (read: expensive if not impossible) to put the cat back in the box (is that the phrase? Pandora’s box? Shroedinger’s cat? I dunno…)
Anyway, you get the idea.
Company partnerships can be set up in a lot of different ways: there may be one manager and the other partner(s) are only silent investors, or maybe the company is largely run by the employees and sort of just “generates income” for an estate. The company might be owned by separate companies that are indirectly owned by the various partners. The employees may have stock in the company. There could be shared management provisions in the partnership agreement, or day-to-day decisions are delegated to one partner while the overarching business strategy decisions are made by the other partners, or with their consent. That’s all possible and we haven’t gotten into different company types, there’s fundamental differences between LLCs and Corporations, S Corps, Limited Partnerships, and so on.
All of this is to say that you’ll need a lawyer with extensive experience in this to advise you about options, strategies, and the pros/cons or risks/rewards with each option.
All of the above scenarios result in different rights and obligations, and therefore, different risks and rewards for different strategies. Not to beat a dead horse, but if your business partner has “rang the divorce bell” at all, you will definitely want an experienced attorney in your corner to let you know the best ways to protect yourself, what you have to do, and what’s just bluffs from the other side!
If you’re into the economics of things, you’ll want to determine the value of the business itself or at least the assets that it owns. You’ll also need to know whether your soon-to-be-ex-business partner would agree to a non-compete agreement for the partner that exits the business. Without a non-compete, many partnerships are worthless–instead of one partner “buying out the other partner” both partners would separately set up competing businesses and basically cannibalize (charm?) the previous partnership’s customers.
If getting a non-compete is an option “on the table,” then it may be worth it to buy out your business partner or offer to sell them your ownership in the business.
This is sort of a darker side of the law, but sometimes business partners simply try and muscle out / freeze out their business partners through what I’d call “legal technicalities.” A lot of things can be done with regards to withholding compensation that a partner depends on, putting them in a sort of attrition war until they “cry uncle.” I’m not really a fan of these strategies, but they’re worth mentioning.
Once you get a business dissolution lawyer involved to explain the legal landscape that you’re looking at and negotiate with your other business partner(s) and their lawyers, it’s time to “ink the deal.” Usually, there are a couple of drafts and redlines of proposed buyout or settlement agreements between the attorneys, but at the end of the day, getting a final agreement signed and closed on will give you a lot of peace of mind and open up your time and energies to get back to work and crush it at business (or, if you sold your shares, walk away into the sunset with a nice fat check!)
The legal landscape is very complex, and it depends on a bunch of things that a non-lawyer probably wouldn’t know about or look for, so grabbing an attorney early on for a consultation is key.
At Sparks Law, we handle business divorces all the time, and we know our way around the contracts backward and forward. If you think you might be in need of an experienced business dissolution attorney, give us a call, we’d love to hear from you!
