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 highlighted certain aspects about the business that the continuing business owner should consider, while planning for the outgoing owner’s exit. Our earlier post can be found here — www.mcbrideattorneys.com/blogs. This fourth post discusses “what” aspects the outgoing business owner should consider prior to an exit, such that she or he can have a hassle-free exit.
Post 4 – How Can Business Owners Protect Their Business Operationally
It is often inevitable that one business owner will exit sooner than the other. The outgoing owner must start thinking ahead to ensure that no unanticipated company liabilities follow such owner after exit from the company and operationally he or she is not responsible longer than anticipated.
Outgoing Business Owner – Aspects To Consider
From an outgoing owner’s perspective, ensuring a maximized final pay-out upon sale of their portion of the business is often the focus, but it is not the only matter to be considered. Certain acts done as a business owner or authorized officer may continue to bind an outgoing business owner even after an exit from the company. It is a good practice to keep a list of documents signed by the outgoing member in the course of business, which may make him or her personally liable and bound by the obligation (e.g., personal guarantees of promissory notes issued in favor of banks or third parties and leases). It is a good idea to review terms based on which such guarantee was given. In case of a loan, a change in company ownership will typically require the bank to be notified, and often require the bank’s consent before an ownership change can be implemented.
The outgoing owner may consider retrieving properties and assets that were contributed to the business as capital. If the outgoing owner desires to take certain assets upon exit, he or she must ensure no encumbrance remains on the asset (e.g., a lien on assets as collateral for a bank loan). Typically terms of loan or security agreements will require a company to obtain the bank’s prior consent before the company releases any such assets. Intellectual property (“IP”) is typically owned by the business, but there are situations where the IP may be held by the outgoing owner, in which case selling the IP or licensing (renting) it to the company should be considered. The outgoing business owner should also check the company agreement for non-compete restrictions applicable to outgoing business owners to ensure that they do not violate any terms restricting them from starting a competing business, such as, for example, part-time consulting in the similar business. With proper negotiation and planning, the remaining business owner may be willing to provide a written waiver for specific activities the outgoing owner proposes to undertake.
These are just a few scenarios where outgoing business owners may need to plan ahead.
Our next post will focus on options business owners may explore if they disagree on certain aspects of the business upon the outgoing business owner’s 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.