I often tell people that starting a small business with a partner is similar to a marriage. You share your hopes and dreams for creating a successful future with someone else. Frequently, you will spend more time and share more of your concerns with a business partner than you will with your spouse. So, what happens if things do not work out? What happens if you have to endure a business divorce?
Similar to the end of a marriage, you may experience emotions of loss, insecurity, fear, perhaps even betrayal. Beyond your emotions, you may have financial assets and/or liabilities to divide. You may have employees, customers, vendors who all need to be informed and potentially divided between the two partners.
The thought of this may now be making your palms sweat and your heart race. Have no fear; there are many things you can do now to prepare for the dissolution of your business, even if it never happens
The first thing to understand is what type of business entity you have. Is it a sole proprietorship; a partnership; a corporation or a limited liability company? Depending on what form your business takes, you may have some very simple things to do to create a clear pathway in the event of a business divorce. For any type of business, you may have an agreement that sets forth the rights and responsibilities of the partner in the event of a dissolution. The agreement may be called a partnership agreement, a shareholders’ agreement or an operating agreement. Regardless of what it is called, it can function like a prenuptial agreement to know how to get out of the relationship. If you do not currently have one, you should invest the time and resources to create one. Drafted properly, such an agreement can provide how one person buys the other person out of his/her equity. It can set forth who gets to keep the name and goodwill of the company. It can provide a dispute resolution clause to assist you with separating the business.
If you do not have such an agreement, or the agreement is silent on how to dissolve the business, you still have options. You can offer to either purchase your partner interest or sell yours. Oftentimes, the best way to do this is to set a price for the overall value of the business. You may be able to do this yourselves or you may seek out a business valuation. Unfortunately, most of us believe the true value of our business is much higher than it objectively is. Obtaining an outside valuation may cause you to rethink whether you want to purchase your partner’s interest or reconsider the benefits of selling yours.
You may seek to sell the business as a whole. However, the business valuation discussed above may come back to haunt you. Furthermore, if you are selling the business as an alternative to divorce, that may drive the price down even further. Also, there are a number of important steps you need to satisfy to protect you if you are trying to sell your business. For example, assuming there is a market for your business, you should have a non-disclosure agreement with any potential buyers. A potential buyer will want to go through all of your books and may become less enchanted with your business once s/he gets to peek under the hood. For any sale of a business, you should have an experienced business lawyer involved to protect you as the transaction is documented.
There are many other possible alternatives. The least desirable may be to file a lawsuit for the dissolution of your business. This can be extraordinarily costly, in terms of money, time, emotion and energy. When you are through with this process, you may find the only thing left of the business that you built are hard feelings and legal bills.
As always, the best way to protect yourself from the misery of litigation is to act now. If you do not have your business properly documented, contact a business attorney to assist you. Even if you have documentation, you should have a lawyer review it to ensure that it is compliant with current law and that it anticipates the concerns of dissolution.
Gordon Law is here to draft or review all of your business documents.