Carefully Plan Before Asking a Business Partner for a ‘Divorce’
Originally published: 01.01.11 by Mike Coyne
Identify alternatives to terminating the company and keep emotions in check.
At least once a year, a company owner comes to us wanting to “divorce” a business partner. The reasons cited sound a lot like the reasons given by clients who are contemplating divorcing a spouse: My partner has lost interest in the business and is not carrying his weight; my partner and I no longer agree on how to run the business; my partner is cheating by dipping into the kitty to support various bad habits; etc. The discussion that follows also is similar to the ones that take place between lawyers and their clients contemplating a marital divorce. First, the lawyer must ask the client to consider the consequences of divorce, one of which is that the marriage ends. In the case of a business divorce case, is there a way of separating from your business partner that will not destroy the business? If the business is terminated, will you be in a position to support yourself financially? Is it possible to split the business between you and your partner in a way that is both equitable and financially feasible? Finally, and most importantly, will you and your business partner be capable of keeping emotion out of the breakup, and if not, what are the likely consequences? While you cannot control the reaction or behavior of your business partner, it still makes sense to engage in some careful planning before you begin the process. If possible, it is always good to offer your business partner several alternatives for breaking up the business. If your partner is close to retirement, it may be as simple as offering him a package of deferred compensation that will carry him to retirement age. Alternatively, you might determine what you are willing to pay for your partner’s half of the business and invite him to purchase your half of the business for the same amount. On rare occasions, it really is possible to divide the business with each of you taking half of the equipment and half of the customers. Offering your partner several alternatives accomplishes a couple of things. First, it lets your partner know that you have given the matter a great deal of careful thought, and it suggests that your mind is made up. Additionally, it tends to structure and focus the conversation in a way that is favorable to you. The worst thing you can do in a business breakup is to get angry and engage in various forms of “self-help.” Not long ago, problems arose between two partners in a business we represent. One partner got fed up and — over a weekend — removed half of the assets from the business and set up a competing business. The ex-partners are now engaged in litigation that likely will cost the partner who engaged in self-help a judgment against him in excess of onehalf million dollars. Remember, until your business relationship is formally terminated, you and your business partner have fiduciary duties to each other. Breaching those duties can, and most likely will, result in an acrimonious “divorce” — a consequence all partners should strive to avoid.
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