Business divorces can be very similar to a marriage divorce: disruptive, difficult, and messy.
When a business partnership (the term “partnership” is used in the generic sense and not to indicate the form of business entity) starts deteriorating, it can be very similar to a marriage divorce: disruptive, difficult, and messy. The business partners are under emotional stress, and their lines of communication break down, usually resulting in adverse effects on the business’s operations. There are a number of issues to consider in a business divorce.
1. Legal Entity: The nuances of a business divorce can vary greatly depending on the legal entity involved. For example, the issues involved in splitting up a corporation can be very different from those involved in splitting up a partnership or a limited liability company (LLC), particularly when it comes to taxes.
2. Form of the Split-Up:
- Should the partners try to sell the business to a third party and distribute the proceeds?
- Should one partner sell his/her interest to a third party?
- Does one partner want to buy out the other’s interest in the business? If so, the partners will need to reach agreement on the price and terms of the sale.
- What if both partners want to stay in the business? In that case, the partners might want to work toward dividing the business between the partners. This often minimizes the significance of the valuation issue, and focuses more on relativity than on absolute dollar amounts.
- Should the business go through a planned dissolution and liquidation?
3. Valuation of the Business: One of the most contentious aspects of a business divorce is determining the value of the business, which often involves getting business appraisers involved.
4. Tax Implications: There are tax implications associated with the split up of a business. The tax consequences are very different when a corporation is involved, as opposed to a partnership or LLC. For example, the liquidation of a corporation can result in both the corporation and the shareholders being taxed, while the liquidation of a partnership or LLC can be done tax-free. Thus, it is always wise to involve a tax professional early in the discussions.
5. Emotional Factors: In addition to the practical and legal considerations, there are often emotional factors at play in a business divorce, especially if the owners have not only a long-standing professional relationship, but a personal one as well. And this can be exacerbated when the partners are also family members.
6. Operative Agreements: Ideally, at the beginning of a business relationship the business partners will enter into a shareholder agreement, operating agreement, partnership agreement, or other agreement that determines how the business separation will be handled. Unfortunately, all too often that is not the case. Without such an agreement the partners will be faced with undesirable alternatives, such as suing each other or a forced dissolution and liquidation of the business, in which case third parties or circumstances, and not the business partners, will determine the result.
7. Mediation: This allows the business partners to call a time out from confrontation and to explore a resolution of the dispute with a neutral third party. In a business divorce, while there may be certain matters that can be litigated, there are often many significant business issues that do not involve claims of wrongdoing and thus are not litigable, but they still must be resolved for the business split up to take place. And even if a business issue is litigable, the judge or jury may not be able to resolve the issue as satisfactorily as the partners if they were able to negotiate effectively. The mediation of a business divorce is a unique overlap of “dispute” and “deal” considerations. Basically, it involves making a deal between disputants who may once have had a good professional, and often personal, relationship, but who have become adversarial, sometimes to an extreme. When it comes to business divorces, having a mediator or arbitrator with specialized knowledge and experience can make all the difference. As business divorces often involve financial, accounting, tax and business issues, working with a mediator or arbitrator who understands the nuances of these issues is critical.
Pat Jones has been on the Henning panel for over 19 years and brings 40+ years of experience and a unique perspective to the mediation and arbitration table in business divorces. His background includes being a CPA with a Big Eight accounting firm, practicing corporate and tax law as a partner in three major law firms in Atlanta, and serving as General Counsel, CFO and head of investor relations of a public technology company, as well as the Chair of the Audit Committee of a private technology company for 15 years. Pat was also the Chair of the Tax Law Section of the Atlanta Bar Association, and the Co-Chair of the Georgia Limited Liability Company Committee, which drafted the Georgia Limited Liability Company Act. Click to schedule your next mediation or arbitration with Pat today!