‘Breaking Up Is Hard To Do’

    A business “divorce” typically occurs when the owners decide that the benefits of continuing their relationship are outweighed by financial issues such as compensation or personal expenses, or other issues such as control, business philosophy or succession/generational differences. These situations are often quite traumatic for the principals, whose identity, friends and daily routine are intimately entwined with the business. The emotional, financial and legal issues can be very similar to those of a marital divorce.

    If you are looking to extricate yourself from a privately held business, there are a number of steps to take, regardless of the size and profitability of your business.

    First, find competent, experienced independent counsel to advise you. This is not a time to “go it alone.” The business and tax consequences of a mistake, or of an option not considered, could have dire implications to the sale value or future control and profitability of the business.

    Your first instinct may be to hire your company counsel -“ the attorney you have worked with for years -“ but independent counsel is key. Company counsel can represent many parties: the company; the business owners; a group of shareholders; or all of the shareholders. There are almost always conflicts among these entities, and a conflicted attorney may find himself obliged to withdraw from representing any of the parties, resulting in the need to take more time and spend more money to hire a new attorney.

    Second, gather all of the facts for your attorney. It is important that counsel understand all of the fundamentals of your business, and of the disagreement. Be sure to provide your attorney with copies of your business’s organizational documents, relevant contracts and financial statements, as well as material letters, e-mail and other communications, and a list of the company’s principal assets.

    Now your attorney will be able to give you his legal analysis of your situation, based on relative strengths and weaknesses of all parties’ positions and intentions, and the applicable law in the jurisdictions where your business was formed and is operating.

    The third step is to determine the result you are looking for, which could include:

    • a reconciliation of the parties;

    • a division of the assets between the owners;

    • an exit or buy-out of one or more owners; or

    • a sale or liquidation of the business itself.

    Once you have decided on the result you want, you and your attorney will then devise a strategy to move forward. That strategy may include litigation, generally involving breach of contract and violation of law.

    While litigation is always a possibility, it is wise to ask whether the cost of litigation outweighs the benefit. You may benefit more from the threat of litigation than actually following through with a suit. The uncertainties, cost and risks of litigation may motivate all parties to negotiate to avoid a fight. Once litigation commences, it can have a life and momentum of its own, and the parties’ positions may become entrenched.

    You and your attorney should consider what other means are available to bring pressure on the parties to settle. For example, depending upon the circumstances, taking control of company cash, removing critical assets from the company, calling loans, refusing guarantees, making capital calls and starting a competing business have all proven effective. Again, the advice of independent counsel is necessary to determine whether these options are available, would be effective and would not cause more harm than good.

    Lastly, the final agreement must be written very carefully. The parties will have been through a difficult and confrontational process, and the last thing anyone wants to do is create a new misunderstanding.

    This article is not intended to provide legal advice, or to give answers to specific questions, but to raise issues that should be explored with independent counsel. The information is generally applicable to corporations, limited liability companies, partnerships and limited partnerships formed in all jurisdictions, but the answers will depend upon the facts of the individual situation and applicable law.

    * With apologies and thanks to Neil Sadaka

    Clark Bien, shareholder at Strobl & Sharp PC in Bloomfield Hills, Mich., has been chief legal officer and adviser to several privately held international manufacturing and distribution companies. His work has covered contracts, litigation/arbitration, intellectual property, real estate, employment, collective bargaining and general business advice. He can be reached at [email protected].