Business Divorce: Part III
No one enters a business partnership expecting it to end in a business divorce. However, when conflicts become irreconcilable, dissolving the business relationship may be the best solution. The legal process of a business divorce can be complex, but understanding the key steps can help you navigate the split with greater confidence and less disruption. In this post, we will explore the legal steps involved in a business divorce, including how assets are divided, how to handle buyouts, and the benefits of alternative dispute resolution.
Before taking any formal action, it’s essential to evaluate the business structure and review the governing documents. The structure of your business (e.g., partnership, limited liability company, or corporation) and the agreements in place will guide the legal process. Ideally, these governing documents will have adequately prepared the company for a business divorce (see Blog 2 on this topic).
If your governing documents account for business divorce, the next steps will be to comply with those requirements. These may include the need for a partner/member/shareholder vote, steps to be taken to value the exiting partner’s interest, etc. Complying with the provisions of your governing documents is an important step in keeping the divorce process smooth and avoiding any potential future legal headaches.
If your governing documents do not address business divorce, the process can be messier. Ideally, the company and the departing owner will be able to reach an amicable resolution through negotiation. In this case, the company should be sure that any such agreement is appropriately ratified by the company.
However, if an amicable resolution is not reached through an informal process, it may be necessary to consider dispute resolution, either in the form of mediation or arbitration. This process will likely include the need for a valuation of the business, which is one of the most common areas of dispute in a business divorce.Absent valuation methods in the governing documents, the valuation process typically requires the retention of a neutral third-party appraiser. Ideally, the parties should agree to be bound by the valuation of the appraiser, or agree upon a resolution mechanism if they do not agree. This will prevent the waste of time and funds that can arise from a disputed valuation. There are many possible approaches to take to valuation, including:
- Asset-based Valuation: This approach looks at the value of physical and intangible assets, such as equipment, intellectual property, or customer lists.
- Income-based Valuation: This method considers the business’s potential for future profits, often relying on projections and existing financial statements.
- Market-based Valuation: This compares your business to similar businesses that have been sold recently to estimate a fair value.
- Combination: Many appraisers will use a combination of all or some of the preceding methods.
Once a valuation is agreed upon, the remaining terms of the buyout should be formalized. This will include items such as the terms of payment, any restrictive covenants (such as non-compete agreements) that will apply post-closing, etc.
Unfortunately, sometimes it is not possible to reach an amicable resolution for buyout in a business divorce.In this case, the most appropriate solution may be the complete dissolution of the business. Dissolution can be agreed to by the parties, can be triggered by the governing documents, or can be accomplished through judicial dissolution. Judicial dissolution refers to the legal process through which a court orders the dissolution of a business entity. This typically happens when business partners or shareholders cannot resolve disputes and the business can no longer function effectively, and is accomplished by a court order, upon the petition of one or more of the owners.
Dissolution is frequently a lengthy process. Dissolution typically entails a liquidation of assets, the payment of outstanding liabilities, a formal notification to all potential stakeholders (including creditors), and a distribution of remaining assets.
In conclusion, the legal process of a business divorce can be overwhelming, but knowing the key steps involved can help make the process smoother. From assessing your business structure and reviewing agreements to valuing assets and handling the buyout or dissolution, each step requires careful planning and legal expertise. Understanding your rights and responsibilities is crucial to protecting your interests during this challenging time. If you are undergoing or likely to undergo a business divorce, the team at Way Law is here to help!