This series focuses on “business divorce,” the break-up of a business between business owners due to disagreement or other circumstances). A business break-up leads to either one owner continuing the business without the other owner, the forced sale of the business to a third party, or a total dissolution or winding up of the affairs of the business. Because the situation can be contentious, it may lead to unnecessary litigation. Shutting a business is often not a viable option, so it may be better for one member to either buy out the other member or sell its stake to the other member. Thus, it may be good for business owners to think ahead, discuss, and consider preparing an exit plan where one business owner may exit sooner than the other, in effect like a business prenuptial agreement.
This will be a multi-post blog entry. Our earlier post talked about “why” a business divorce might happen and can be found here [Insert link once posted]. This second post discusses “how” business owners could protect themselves from various perspectives in anticipation of a business break-up such that each owner has the least to lose.
Post 2 – How Can Business Owners Protect Themselves in Anticipation of a Business Divorce
Have you thought about where you see your business 5 years from today, and are your goals aligned with that of your business partner? It is a good idea to have discussions about this occasionally.
Once business owners realize that their business partners have different long-term goals, or may wish to exit the business at different times, it may be time to start thinking about the anticipated ownership changes associated with those differing goals to ensure the outgoing member’s exit is smooth and that the business disruption from such change is minimal. This post discusses some aspects of the business that require planning in advance of an exit.
Ownership of Assets
As part of the planning, the business owners should ensure all assets, whether owned or leased, are in the name of the company (e.g., trademarks, logos, office space, factories, and/or warehouses). Additionally, suppliers and customers may have a better relationship with the outgoing owner of the business. Planning should be done so these customers and suppliers stay with the business. In the most extreme cases, the supplier or customer may have a change of control provision that allows them to terminate their contract with the business if the ownership changes. The continuing owner should think of overcoming some of these challenges which may not surface early on in the business divorce process.
Our next post will focus on some operational aspects business owners should think about when planning ahead of an exit.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.