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. This first post discusses “why” a business break-up may happen, describing some instances of conflict that business owners may encounter.
Post 1 – Why Might a Break-up Happen
In the course of running a business, owners often disagree on certain decisions such as mergers (sale or acquisition); consolidating with or acquiring a competitor; incurring significant additional capital expenditures; going public; pursuing business expansion endeavors; and a host of other issues ranging from strategic to operational. Fortunately, most disagreements are worked out in the normal course of business, but sometimes the issues are deeper and the disagreement lasts longer. There can be myriad reasons for the underlying issue: one business owner may be a risk taker and aggressive, while the other may not be; one partner may have a family descendant as successor to hand over the business, while the other does not; one owner might be older than their business partner and closer to retirement; one partner might have family wealth to fall back on, while the other relies on the business to support their family; one owner may run out of cash for additional capital, while their business partner may have spare cash lying around.
Business owners may even have disagreements over certain strategic matters such as borrowing funds and pledging ownership interests or entity assets to creditors, inclusion of new members to the business, appointment or removal of certain key management personnel, and other similar issues. Disagreement or a deadlock on some of the above may cause discomfort among business owners, and that might just be a starting point of a long business divorce process.
Meanwhile, a flourishing business with good fundamentals in a growing market will probably be an attractive target for buy-out offers from competitors. While one owner may perceive it as an opportunity to reap the benefits of their hard work and expertise in building a sound business, however, their business partner may want to retain control and closely hold the business to pass it down by succession within her or his family.
Whatever the reasons may be, often business owners might have different personal goals in mind leading to conflict with regard to the future of the business. It is best to identify these conflicts early on, so both owners can appreciate the “why” of each other’s decisions rather than having an expectation mismatch well into the business relationship.
Our next post will highlight various aspects of a business that warrant advance planning, for each party to protect itself and the value of the business, once they have discussed and proceeded towards a business divorce.
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.