Breaking Up: A business divorce primer

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Breakups are nasty. Splitting up can spur resentment. The so-called conscious uncoupling process can be hellacious for all of the parties involved. At the same time, a divorce may be the only thing that can salvage the lives of others, and a business.

If you think that we’re talking about the end of a marriage between two people then you’d be wrong. What we’re actually talking about is a “business divorce,” the end of a corporate partnership, which can be just as emotional, expensive and complicated as a regular divorce.

A Look at Business Divorces

When an economy is in a downward spiral, the marketplace isn’t garnering consumer interest and an industry is suffering, many businesses will likely shut their doors down, enter into liquidation or go under. And when that business involves at least two people it will lead to a business divorce. Everything is up for grabs, everything is up for contentious debates; from outstanding business debt to the remaining tax liabilities, co-owners can go through a bitter divorce.

Moreover, a business may not even be experiencing lackluster sales or a paucity of profits. What the enterprise could be going through is a dispute between the both owners’ vision of the future. Whether it’s about who should be hired or fired or if the private firm should accept or decline a project, joint business enterprises have to make decisions everyday, and varying viewpoints can help into a business divorce.

Over the years, according to Riccardo A. Di Monte of Di Monte & Lizak, LLC, there have been numerous examples of business divorce cases. Partnership dissolution, shareholder derivative actions and limited liability company lawsuits are just some of the common business divorce scenarios that have arisen in the past. Since the owners can’t come to an agreement on terms of separation, or resolving a particular disagreement, the parties then enter into litigation.

Before anything else, however, most legal professionals encourage negotiation. It’s also crucial to ask the question: are the differences so severe that the co-owners must end the partnership and enter into a different path? The other question is: can one buy out the other?

These business divorce cases can involve partners who have been together for as long as 50 years, and oftentimes involve spouses and children, especially family businesses.

“Some family businesses pick and choose between which children can be involved. Others mistakenly include all children much to the detriment of company management,” wrote Di Monte. “I often observe companies that are started by the father, grown by his son, and squandered by the grandson. Sharing a surname is not necessarily a recipe for success.”

Simply put: a business divorce can be just as nasty and ugly as any other divorce.

Like a spousal divorce, a business divorce can have an effect on your future. It’s stated that conventional LLC agreement consists of a clause that notes that a withdrawing partner is not banned from entering another business, but if any upcoming business opportunities are in the same vain as the initial enterprise then that individual will have to speak with the firm.

It’s a never-ending story.

The Rise of Business Divorces

Prior to the 2007/2008 economic collapse, business divorces weren’t as common. Since then, however, says attorney Michael A. Gold of Jeffer Mangels Butler & Marmaro in Los Angeles, business divorces have become ubiquitous.

Speaking in an interview with Smart Answers columnist Karen E. Klein (via Bloomberg News), Mangels explained that after the shutdown of Lehman Brothers, business partners started to look at their risk profiles; one would say the firm is risk-proof, while the other one would question the soundness of the business. External factors, too, suddenly become apparent, such as if a bank pulls funding or there is little capitalization. Co-owners may not want to guarantee debt with the other partner.

“Very often we are dealing with banks and other third-party financing,” Magels said. “One case I’m working on involves seven different lenders, all with different loan agreements, scattered across the Southwest. One shareholder may want to pay the debt in full, while the other says ‘Why do we want to do that? These guys will let us get away with paying 75ยข on the dollar!'”

In recent years, governments have imposed stricter policies and laws that favor employees. In other words, dealing with employees can pose trouble for the co-owners. Some may want to let go of employees, while others may be cautious and fear legal troubles down the line.

Of course, new tax laws, new competition and new bureaucratic red tape are other issues.

Need tips on how to divorce-proof your business? Here are some ideas:

  • Keep thorough, detailed and organized records.
  • Pay yourself a reasonable annual salary.
  • Sacrifice other assets within the business to receive 100 percent ownership.
  • Receive fair valuation for the company by an objective third-party.
  • Raise capital by selling a minor stake in the firm to employees or investors.

Final Thoughts

Think of it this way: a traditional divorce between two people, who once upon a time loved each other, often involves television, the silverware, the house and assets. In a business divorce, instead of cutlery and paintings, it will include arguments over tax liabilities, corporate debt, business property, staff and assets that have been accumulated over the years.

The old adage is that marriage is the leading cause of divorce. In this case, commerce is the leading cause of business divorce.

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Andrew Moran

Andrew Moran is a full-time professional writer and journalist, who covers the areas of business, economics and personal finance. He has contributed to Benzinga, Capital Liberty News, Career Addict, Money Morning and PFHub.