Business Divorce: How to Break Up with Your Business Partner Without Destroying the Business – Part I

Most businesses are started with the best intentions and tons of optimism. Sadly, not all businesses or business relationships work out. According to the various available statistics, between 50% and 70% of business partnerships fail. Several reasons exist why a business may need to break-up, ranging from retirement to mental incapacitation to fraud, or just a general inability of the owners to continue to run the business together.

Emotions run high when a business partnership fails and former lifelong friends can become bitter adversaries. Allegations can fly and thousands can be spent on attorney’s fees attempting to separate a tangled web of assets ending in the death of a once profitable business. No one wants to be in the situation described above and several steps can be taken to avoid such from happening to your business.

Execute A Partnership Agreement at the Beginning

First, and often the easiest and cheapest, is to have all of the involved parties/partners executed an agreement when the partnership or business is initially started addressing what happens when owner is no longer pulling their weight, wants to retire, goes bankrupt, gets divorced, becomes disabled, or dies.

Other important provisions to include within this agreement address oppressive situations (when majority owners refuse to share information or control or otherwise pressure minority owners to act in a certain way), identify triggers for dividends and distribution, and clarify non-competes or other restrictive obligations. Having an agreement which discusses these situations  (in addition to others)  can help stop what could be simple events from spiraling out of control.

Several different type of agreements can be entered into and each type focuses on different items (partnership agreement vs. buy-sell agreements, etc.). We recommended consulting with an experienced business attorney to ensure that all the important topics are covered.

Do Not Ignore the Warning Signs

The second step is to pay attention to warning signs. If you see that something is becoming a problem (someone is not pulling their weight, doing things in a way you disagree with, etc.), it is important to address the issue immediately. One of the worst things to do is to let something go, hoping that the person doing it will change their behavior or figure out on their own that you disagree with the it.

Keep Things Calm

The third step is to only talk when calm. This may be the hardest step of all. However, when tempers flare, people say things that they do not really mean (or did not mean to say to that person’s face). Once something has been said, there is no real way to unsay it. Repairing a relationship after a hurtful argument can be difficult, if not impossible sometimes.

There are hundreds of articles available with tips on how to have a difficult discussion while avoiding getting pulled into an argument; we recommend reviewing a few of these to get some tips that will work for your communication style.

Focus on the Entity

While talking, it is often helpful to focus on the entity, and what is best for the entity, not on each other, Avoid using phrases such as “because you did …” or “you have done…” and use phrases such as “Since …. occurred, the business needs to..” instead.

It is amazing how easily feelings can get bruised (or emotions heated) and avoiding sentences that appear to place responsibility (or blame) on one party or another can help to avoid emotional outbursts. While this is not always possible, it is helpful to approach the situation as team; the two (or more) of you against the problem, not against each other.

Determine Your Priorities

If it is time for your business to break-up, it is important that you are aware of what your personal priorities are with regarding to the business. Once you are able to determine what really matters to you, it will make the negotiation process easier as you will not be distracted by unrelated issues.

A lot of time is often spent arguing about items that do not really matters; does it really matter who ends up with the actual assets of the entity provided that you received your fair share of the value of the assets? On the flip side, if it important to you that you receive an item back that you contributed to the entity (i.e., a piece of real property, equipment, a patent, etc.), then you may want to make this one of your main negotiation points.

Estimate the Financial Impacts

Breaking up is expensive. Depending on the type of break up (amicable, disputed, etc.) and how the break-up is handled, the cost of breaking up can range from a few hundred dollars to hundreds of thousands of dollars.

The costs of break-up are various and range from those associated with addressing the contractual obligations and liabilities of the business (e.g., leases, current purchase orders, outstanding loans, etc.), to those related to obtaining financing to fund the break-up (e.g., in the event of a redemption).

Occasionally, the business can continue as on-going entity following a break-up but often it becomes a casualty of war in the battle between owners; either never fully recovering (profitable-wise or otherwise) following the break-up process or its death being intended as part of the separation process. Obtaining the assistance of an experienced professional can help to mitigate some of the issues related to business break-ups and potentially save the life of your business.

The issues above are only a few of those that should be considered when deciding to terminate your relationship with your business partner. Please read the following article in this series, “Business Divorce: How to Break Up with Your Business Partner Without Destroying the Business – Part II” for additional items to consider when deciding to terminate your relationship with your business partner.

At the end of the day, only you can decide if it is time to break-up with your business partner or not. Due to the potential impact of business break-up, it is not a decision that should be made taken lightly or made quickly. Should you have any questions about potentially ending a business relationship or alternatives to ending a business relationship, or would like to schedule a free initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or contact us online.

Navigant Law Group, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation, and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, and Guardianship.

This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.

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