Business partnerships, much like marriages, are complex relationships that come with their share of challenges and rewards. When business partners start a company together, they often expect to face growing pains. However, when conflicts become irreconcilable and threaten the future of the business, a business divorce may be the only viable solution.
In these situations, it’s essential to seek guidance from an experienced business attorney to create agreements that not only help prevent disputes but also facilitate a smooth separation when necessary, minimizing harm to the business and the partners involved.
Common Reasons Business Partnerships Break Up
Business divorces often happen for reasons similar to those that cause marital separations. Here are some of the most common causes of business partnership breakdowns:
Even a successful business can put partners at odds, as increased success often brings more pressure, new challenges, and unanticipated issues. In these situations, small cracks in the partnership can quickly grow into insurmountable differences.
How to End a Business Partnership
The goal of a business divorce, much like the end of a marriage, should be to avoid a lengthy and expensive legal battle. While litigation is an option, it is typically seen as a last resort, as it can lead to a decrease in the company’s value, significant financial costs, or even the dissolution of the business.
Here are some key steps to consider when navigating a business divorce:
1. Review Existing Agreements
When a business divorce appears imminent, the first step is to consult any existing shareholder, partnership, or operating agreements. These agreements often provide a structured process for handling disputes and potential separations.
For instance, agreements may include deadlock-breaking mechanisms, such as a buy-sell provision (a buyout agreement) that allows one partner to purchase the shares of another partner at a predetermined price if a deadlock or another triggering event occurs.
Additionally, some agreements may have dissolution clauses that outline the process for dissolving the business. This includes settling debts, distributing assets, and legally ending the partnership.
2. Negotiate With Your Partner
If no agreement outlines the process for a business divorce, partners may still be able to negotiate an amicable resolution with the help of their attorneys. Depending on the situation, this negotiation could allow one partner to step away from the business while addressing issues like company value, debts, and liabilities.
Alternatively, the partners may decide that selling the business or its assets and dividing the proceeds is the best course of action.
When direct negotiations stall, attorneys might recommend bringing in a mediator or professional arbitrator to facilitate discussions. Successful arbitration or mediation can result in an out-of-court settlement, which is usually far more cost-effective than going to court.
3. Litigation
If negotiations fail and contractual mechanisms cannot resolve the dispute, litigation may be the only option. In such cases, one partner may seek judicial dissolution of the business.
Judicial dissolution typically requires the partner seeking dissolution to prove that their counterpart engaged in improper conduct, such as breach of fiduciary duty, or to demonstrate that it is no longer feasible to continue the company’s activities. The grounds for dissolution vary by state law, and courts may order alternative remedies, such as appointing a court-ordered tiebreaker or mandating arbitration.
Dissolution by court order may not yield favorable terms for all partners. The dissolution process can result in undervalued partnership interests or business assets, and once dissolved, the business can no longer generate income.
Protect Your Interests in a Business Divorce
The best way to ensure a smooth business divorce is through proactive planning. Well-drafted legal agreements that specify clear processes for resolving disputes and ending business relationships can help avoid costly and drawn-out separations.
If you don’t currently have an operating or partnership agreement, it’s crucial to consult with an attorney before a dispute arises. Our business attorneys can help you create agreements that protect your interests and ensure a structured approach to resolving potential conflicts.
If you are facing an inevitable business divorce, we can also guide you through the process, helping you protect your financial and legal interests as efficiently as possible. Contact us today to schedule an appointment and discuss your options, including potential tax liabilities, legal filings, and strategies for winding down the business or transitioning ownership.
