Divvying Up

"Business divorce” is a term invented by attorneys that means exactly what it sounds like it does: It is what happens when the relationship between business partners is irretrievably broken. Like a divorce between spouses, it can involve anger and allegations of wrongdoing and can result in bitter litigation. Unlike a divorce, it may involve a sale of the business to a third party, one partner buying out the other partner, or the business winding up its affairs.

There are many things that can cause partners to end up wanting to part ways. These might be as essential as different visions for where the business was headed or different goals for the business, as serious as suspicions of wrongdoing, or something as seemingly harmless as one partner’s spouse having a higher monthly cell phone bill than the other partner’s spouse.

Yes, that really happened—and in a very successful business. Luckily the issues were resolved in a short period of time through pre-litigation mediation, so the company’s business suffered minimal damage and continued on with a single owner, but it’s an example of how business divorce can come about in a manner that’s difficult to fathom.

It is important to ensure the business maintains its assets and value when partners want to “divorce.” This is true whether it is friendly business divorce or not. One of the first tasks is determining what needs to be done to allow the business to continue to function. This may seem simple, but in many situations, the partners each bring value to the company by running or being responsible for different core, day-to-day functions, such as one being in charge of operations and one being in charge of sales. Keeping partners working together may be difficult, even when it is in their best interests, because of whatever issues exist between them. It is helpful to involve professionals such as attorneys or accountants where partners are not communicating well or in a constructive manner.

Attorneys can help communication between partners, document a quick split, or represent parties in litigation. Even in a friendly business divorce, it is important to make sure the split is properly documented and to involve accountants. Whether one partner is selling to another or the business or all of its assets are being sold, it will have tax consequences that the partners should be aware of before signing any agreements.

Like a divorce between spouses, [business divorce] can involve anger and allegations of wrongdoing and can result in bitter litigation.

Another issue is determining whether or not a partner has been committing bad acts. A bad act can vary from diverting company money or assets to directing company business to a new entity, and may call for the appointment of a receiver on an emergency basis to protect the assets and business. A receiver is a third party who is appointed by a court to do such things as manage the company day-to-day or take responsibility for the company’s finances. This is an added expense for the business, which is responsible to compensate a receiver, and though it can turn into a significant expense, it may be the only option to maintain the company’s business and value in certain situations.

The reality is that once business partners decide to split, nonissues, like the aforementioned cell phone bill, can become big issues. It’s important to allow calmer heads to prevail, allowing the partners to take a step back and see the big picture. It is easy for the partners to amplify any perceived or real issues and turn the situation into World War III. If there are no apparent bad acts, the chance for a positive resolution exists. If there are, all bets are off. The company may not survive, much like divorcing spouses spending all of their assets fighting each other instead of looking for a mutually beneficial resolution.