Part Two Dealing With The Unthinkable: Business Divorce

By Brian Haussmann, Partner, Tabet, Divito & Rothstein LLC

View Part One of this article here

Breaking up the ownership of a company can have dire consequences for the company as well as for the business owners. There are things that you can do during the formation of your business partnership that will set the proper, non-combative approach to a change in ownership, but not everyone has the foresight to deal with those things. So, if your business partnership is contentious, and it puts your business at risk, you need to find a way of exiting working with your partner, so you can put it back together, here are some things that you should know to make this a reasonable separation.

1. 1. I’ve been working in my company with my partner for five years. Over that time, he / she has put less and less effort into the company than I have. If we break up the company, why should my partner get 50% of what I’ve worked so hard to build?

      This is one of the most common reasons for disputes and business breakups. Ideally the company’s operating agreement and the partners’ employment agreements will address these concerns, both during the life of the business and in the event of a breakup. Strong agreements adjust compensation based upon performance, contain key metrics by which performance can be measured, and contain buyout provisions that can be invoked in the event of a breach. While partner contributions in time and effort can be difficult to measure, some advance planning can help to make distributions more equitable. If it is too late for that, then the diligent partner should contact an attorney to help him evaluate whether his lazy counterpart has breached his fiduciary duties. It may also be in his best interest to negotiate a reasonable buyout now, rather than lose out on 50% of future distributions in exchange for diminishing effort.

   2. How do I figure out what the company is worth so that I understand what I’m going to get from our “divorce?”

      The question of a firm’s value needs to be determined by a Certified Valuation Analyst. Business appraisers are certified by a professional association, and those individuals are specifically trained in valuation of businesses. If done correctly, this isn’t a “back of the envelope” calculation. It’s important to have this done by a specialist.

   3. I’ve become so upset working with my partner that I just want out. What can I do if he / she doesn’t want to buy out my share?

      The company’s operating agreement or shareholders’ agreement likely specifies the circumstances under which you may leave the business and the terms on which your equity may be transferred back to the company or to its remaining owners. If the agreement does not so provide, you may wish to consult an attorney before giving notice of your departure. You may be able to negotiate your exit with your partner, but how and when you exit may change your rights and the legal status of the business, and you should understand the consequences before acting.

   4. We may be equal partners but my partner has “unequally” spent money on his / her expense account that has drained a lot of ready cash out of the business. What can I do to recover what he / she has spent?

      This is one of many areas that causes dissatisfaction with the partnership. This may be difficult to resolve, unless it is blatantly obvious that the expenditures are not legitimate business expenses but are personal expenses that are depleting the cash / assets of the company.

   5. If we’ve taken unequal distributions from the business over the years, how does that affect our breakup?

      If unequal distributions are set forth in the Operating Agreement, then that would all be proper. If it’s not in the agreement, but has been going on for a long time and nothing has been done, then it’s possible that there’s nothing that you can do to equalize that at the time of a breakup.

   6. If I’m concerned because things aren’t going right, how can I prepare for the possibility that we might break-up somewhere down the road?

      Partners concerned about a future breakup should evaluate their financial position, the performance of the business, and their legal position. The partner should consult with an attorney to ascertain his legal rights and those of his partner. He / she also should consult with an investment banker to ascertain the approximate market value of the business. With advice in those two areas, the partner will be able to determine whether and how to separate other owners from the business or to receive fair value for the partner’s shares. Depending on the nature and success of the business, this could take the form of an outright sale of the business, a buyout of other owners, or a negotiated dissolution.

   7. My partner has not paid me what I am owed. Can I withhold an equal amount from his distribution, or help myself to the funds I am owed?

      No! One of the biggest mistakes partners make when they have been mistreated is to engage in self-help before the dispute has been resolved. Doing so risks forfeiting certain rights. In the worst case, you may have to pay back any benefits, including salary and other compensation, you received during the period you engaged in self-help. This is true even in cases where it is ultimately determined that you were correct that you were owed more.

   8. I want to acquire a new business. I will continue working in my current business, but I do not want to include my partner in my new venture. Do I need to consult him / her?

      The answer likely turns on what line of business you and your partner are in, and whether your target is in the same line of business. If the businesses are in completely different markets, you may not need to include your partner. If they are in the same area, however, the law governing fiduciaries may require you to present the opportunity to your partner. You should consult with an attorney before proceeding. The consequences of breaching your fiduciary duty by failing to present a corporate opportunity to your current company could be dire. Even if not a corporate opportunity, you will need to evaluate whether your work in a new business violates your employment agreement or the company’s operating agreement, and what impact your divided attention may have on the financial performance of your current business.

   The breakup of any relationship is always difficult, and often contentious. The more planning that you can do upfront, while your relationship with your partner is amicable, the more equitable and less disruptive the ultimate break-up will feel to both parties. That’s because the agreement on how the breakup should happen has already been forged. As we said earlier, business changes, the environment changes, and people change. Even though you may feel great today about forming your relationship, time may dramatically change your views. Effective planning can always lessen the pain of those changes.

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   Brian C. Haussmann, Partner, Tabet, DiVito & Rothstein LLC, is a trial lawyer and business litigator with a focus on resolving disputes in privately held businesses. His areas of expertise include business divorces, partner and shareholder rights, corporate governance, fraud, and contracts. Haussmann not only litigates but also provides advisory services to clients, helping them resolve disputes without going to court.

   Brian has received recognition for his legal abilities and ethical standards, including being rated AV Peer Review by Martindale-Hubbell. He has been named a “Rising Star” by SuperLawyers^® and a “Super Lawyer” in Illinois. Reach Brian at bhaussmann@tdrlaw.com.