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 posts highlighted what continuing and outgoing owners should think about in order to protect their positions and minimize disruptions and liabilities during exit planning. Our earlier post can be found here — www.mcbrideattorneys.com/blog. This fifth post discusses options that business owners may have to resolve disagreements over some aspects of the business when one owner decides to leave the business.
Post 5 – What To Do When There Are Disagreements
During exit planning discussions, co-owners may have certain disagreements. For example, the continuing business owner may not want to pay the outgoing business owner more than the fair market value of the stock. In some cases, depending on the type of business, the continuing business owner may want to impose non-compete restrictions precluding the outgoing business owner from starting competing business, either to delay the outgoing business owner’s exit or to deter such owner from quitting altogether. Such disagreements may lead to a deadlock between the two owners.
At such time, the owners might choose to continue the business as is for the time being to avoid any immediate business disruptions and consider going for mediation to resolve a disagreement, much like a married couple going to a counselor. Alternatively, owners may explore the option where one business owner buys the entire ownership interest of the other owner such that at the end the business is left with only one owner, often called a “Buy-Sell Option”. Another option is for the two parties to take their case to an arbitrator and be bound by the resolution adopted by the arbitrator. As a last resort, either owner may use the court system to force the break-up under applicable state law, if any.
Our next post will focus on types of Buy-Sell Options that business owners may explore, how they work, and how they might impact each business owner.
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.