How do you divorce your business partner?
Many times I am asked by clients for advice regarding the dissolution of a business relationship. It is always unfortunate to me that the timing of the clients request for advice is at the end of the relationship rather than at the beginning. The general rule in any partnership is that while you hope for the best you, should plan for the worst.
When you come together and form your business relationship, whether it is a corporation, limited liability corporation, or some other form of entrepreneurial partnership, what you should do is plan for the divorce.
When forming business relationships, there are 3 general rules that absolutely should be followed.
Rule #1: Whatever agreement you have should be in writing.
Oral agreements, while fun and profitable for lawyers, end up being messy and expensive for the clients. The obvious reason is that half the case will be trying to convince the court that your recollection of the oral agreement is right and your partner’s recollection of the oral agreement is wrong. This is very expensive and time consuming.
Rule #2: Plan for the worst case scenarios.
Worst case scenarios include:
1. Death of partner
2. Disability of partner
3. Partner’s decision that he wants out
4. Inability of partner to financially support the ongoing business
Of course the devil is in the details and there is not enough space here to go into all of the contingencies, but you have to try to anticipate the problems you may have going forward the best you can, so you have a solution in place. Hopefully, you’ll never have to go back to the partnership agreement and look at the paragraph that deals with any of these scenarios, but at least everybody has the same document to reference regarding the best way to dissolve the relationship if it should ever come into question.
Rule #3: Also plan for the best case scenarios.
You need to have a written clear allocation of the rights and duties of each partner, which includes a sell-out/buy-out provision, such that if the enterprise is tremendously successful, there is a plan for how to deal with that success.
Scenario B: If you want a divorce and do not have the advantage of not having a competently written partnership/relationship agreement that lays out all the possible scenarios both good and bad, here are a few guidelines to follow.
#1: It’s always better to negotiate than litigate.
Litigation is a very complex, expensive, and time consuming process. If both parties agree to be in the same room, it is almost always faster and less expensive to negotiate.
The most insurmountable problem of the dissolution of a business relationship is going to be the emotional part of the divorce. Often a party will feel that he or she has been taken advantage of and/or is the victim; therefore, I always encourage both sides to get an attorney. The aid of professional representation goes a long way in negotiating settlement and/or resolution of the dispute between the partners.
#2: If the case goes to litigation, strategically decide where to file suit.
If the negotiations are unsuccessful and the case goes to litigation, your first question should be where to file suit. This is a simpler question if all the parties and locations of the business are within the borders of Cook County in the state of Illinois, for example, but it is not unusual for a company to do business throughout the state and/or in multiple states, giving rise to the question where should the case be filed. This is a strategic decision depending on your goal of either a division in settlement of the assets of the company or some other form of legal resolution.
#3: Secure business files — as many as possible and as early as possible.
After you’ve attempted to negotiate and now enter into litigation, it is important for clients to preserve and/or make copies of all the business financial records for purposes of litigation.
This is especially important for the partner who is no longer actively involved in the business. Since the remaining partner has control over the computer, software, cloud storage, file room, checking account, and other such business records, you may be at the mercy of your ability to recall or recover company information that could be critical to your part of the case. It is important to secure files in the early stages of litigation, so that you don’t run into problems of lost documents and misplaced emails down the road.
#4: Choose your attorney carefully.
You want to make sure that you have obtained an attorney who has experience in litigation and who can handle and organize what can be a tremendous amount of evidential information in a way that can be used strategically during litigation of the case.
Now, you don’t need me to point out that Scenario A is better than Scenario B. Plan ahead. Always request legal advice regarding the dissolution of a business partnership at the beginning of the relationship-not the end of it.