'I may be too late to mediate.'By: Leah Norod

Trouble in paradise?  You’re not alone.  According to Forbes, roughly 80% of business partnerships end in divorce: that’s higher than the marriage divorce rate.  If you and your business partner no longer see eye to eye, it may be time for a split.  Here are some helpful tips to keep in mind to ensure you properly cut ties:

  1. Decide On Your Course of Action

Are you ready to throw in the towel and dissolve the company?  Or would you prefer to keep running the business yourself or with a new partner?  After all the time and investment, have you considered selling it?  Before instigating a business divorce, make sure you know exactly where you’re headed.  If you’ll be going solo, consider how that will change your business plan or focus.  That way, you can set a clear roadmap for yourself after your partner is out of the picture and avoid any unpleasant surprises. Speaking of which…

  1. Review the Company’s Operating Agreement

Let’s face it: this is a tricky business.  The last thing you want is a nasty surprise when you break the news to your partner, so make sure to review your company’s Operating Agreement before you move toward a business divorce.  If you put something in writing that requires the company to be dissolved upon your partner leaving, you may want to rethink things if you’re keen to stay.  Alternatively, there may be mechanisms governing how to notify the other of your intent to sell or purchase interest in the company and the agreed valuation.

However, sometimes business owners fail to put anything in writing and may not have a governing document in place such as an Operating or Shareholders Agreement.  In that case, any split in the company will be governed by the appropriate default law.  This all hinges on what kind of entity your company is organized under: is it an LLC? A corporation?  Something else entirely?  Keep in mind that New York will have differing requirements for each.  Which is why you should…

  1. Have an Experienced Attorney Advise You on your Business Divorce

There are a few good reasons for this: if your company has an Operating Agreement (in the case of an LLC) or By-laws and a Shareholders Agreement (in the case of a corporation) an attorney can help you make sense of it and ensure you take the proper steps to comply with it.  If your company doesn’t have anything in writing, an attorney can advise you as to what procedures are necessary and what law governs.  For instance, in New York the removal of an LLC member requires dissolution and a winding up of the business’s affairs to have taken place in the absence of an Operating Agreement to the contrary.  An attorney can help navigate the rough seas and advise you on the best course of action.

Additionally, it is important to engage your own individual attorney in a business divorce situation.  An attorney that helped you form the company with your soon to be ex-partner, or that jointly represents you both in company matters, will have a conflict of interest and cannot help you make the break.  Your own attorney will be able to provide a more zealous representation on your behalf when your interests are not necessarily aligned with your partner’s or even the company’s.  However if you’re worried about potential discord and difficulty, you can try to mitigate the damage by…

  1. Informing Your Partner and Working Together to Tie Up Loose Ends

When possible, it’s best to be reasonable, rational and to avoid adding emotion to the mix when negotiating a business divorce.  Parallel to breaking up with a significant other, this subject is sensitive and shouldn’t be taken lightly.  If you’re respectful and forthcoming, your partner will be less likely to fly off the rails.  Keep the discussion open, and be fair. You may not be able to avoid damaging their ego, but you could side-step a messy collision.

Key considerations in the business divorce will revolve around fairly negotiating things such as: ownership of assets; paying off company debts; usage of the name and brand of the company after sale or dissolution; breaking or assigning any leases; determining any severance packages to employees; rights to intellectual property; and access and ownership of social media accounts and websites.  Breaking up with a partner is rarely an easy task, but can be necessary to take your business to the next level or to allow you to take your career in your own hands.  Taking care to do it properly will save you a headache further down the road.

 

Contributing Editor: Shaliz Sadig

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Leah Norod

Senior Law Clerk

(212) 865-9848

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Stephanie Westerman 2014

Shaliz Sadig

Associate Attorney

(212) 865-9848

Email Shaliz

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