Five things to consider when dissolving a business and related partnerships.
Divorce is scary. Often, when we think of divorce, an image of a husband and wife come to mind.
The wife wants the house and the kids; the husband wants the house and the kids too. Both are angry, both believe they are entitled to everything.
But, what happens when the wife and husband own a business? Do you sell the whole company? Does one of you get bought out?
Undoubtedly, things can get complicated, but most issues can be avoided by using a simple strategy: plan ahead. If you don’t, things can get messy.
Just look at Liz Elting and Phil Shawe, co-owners of TransPerfect, a translation and discovery services company.
Liz and Phil started the company when they were college sweethearts out of their shared dorm room. They were engaged, the company grew, so on and so forth.
Today, Liz and Phil seemingly cannot stand one another. Unfortunately (or fortunately) for them, TransPerfect has grown tremendously, claiming more than $505 million in sales with both Liz and Phil in charge.
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However, the amicable dissolution of their romantic relationship has not translated into the dissolution of their corporate relationship. Over the past five years, tensions between them have spilled into legal battles in two states with humiliating quarrels. Phil has charged Liz with battery by high heel.
Liz has charged Phil with breaking into her office and stealing her confidential emails with attorneys. Testimony of Liz pouring a bottle of water on Phil when he wouldn’t leave her office has been disclosed. To top it all off, each wants to walk away as the sole owner of TransPerfect, but neither want to give.
Business dissolutions are eerily similar to marriage divorces, and in both situations, things don’t always have to be messy.
5 things to consider when dissolving a business and related partnerships:
1. Get a Pre-Nup
At the time of formation, few businesses consider how they may dissolve or part ways. But flying blind in a situation where there are a number of assets is likely to cause headaches (or actual, full-fledged fights) that could be avoided with a buy/sell or buy-out document. Partnership agreements may also provide some guidance. Relevant provisions include a buy/sell provision; a buy-out provision; and a management provision.
Buy/sell provisions define who may own equity of the business and in what conditions that transfer can occur. Buy-out agreements set out predetermined prices and conditions for the sale of equity. This provision helps avoid arguments over specifics and to make sure that owners have as much control as possible over what happens to the equity of their business.
Like a marriage, the prenuptial agreement is entered into before or at the very beginning of the partnership or, in this case, a business. Some questions to consider are: How many co-founders are there? Who had the original idea for the business? Did one of you do the preliminary planning or technical creation, thereby serving as the “principle cofounder”?
Looking forward, does each of you have clear roles? Have you discussed, and reached preliminary agreement on, the proportion of the business that each of you should own? Each of these questions can influence how much of the company a partner may retain in dissolution, and can help you avoid dumping a bottle of water on your partner.
2. Get a Lawyer
Every state allows LLC owners to file the required paperwork to dissolve an LLC, but that does not necessarily mean that the dissolution meets the parties’ needs. A competent lawyer skilled in businesses and dissolving business can provide guidance.
This is especially true when a seemingly pleasant parting is presented with conflict (see Liz and Phil). Getting an attorney early and consulting with them often can be invaluable in a situation where a disagreement persists and the parties need to go to court.
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3. Who Gets the Kids?
Generally, a client for you is a client for the business. However, when trying to take your share of the business, clients often become targets, especially in businesses where there are repeat clients or ongoing jobs. Much like children involved in a divorce, clients could feel alienated or at risk when businesses decide to split up. While clients may be a source of income for the company, they are not, and should not, be treated as simply another asset.
It is important to consider not only client relationships but also who has done the most work or communicated most often with each client. It isn’t unusual for partners to simply take their clients. To separate a client from a partner would go against the nature of professional clients, where the value is found in personal goodwill. For example, a client may hire a specific accountant, not an accounting firm.
4. Take Stock of Assets
Assets are generally used to talk about tangible things. These are usually classified as current or fixed. Current assets include cash, accounts receivable, marketable securities, and inventory, and fixed, or long-term assets mean things that the company owns and can expect to keep for more than twelve months, like land, buildings, equipment, furniture or vehicles.
Assets also encompass less tangible property or intellectual property. For example, a company with a largely recognizable name needs to do something with its trademark. Who gets the rights to use the trademark and its goodwill? Does anyone have those rights? The same goes for any copyrighted material that was produced at the behest of the company, like website content.
Having an attorney who can value all relevant intellectual property and manage it can be a great help when dividing these assets or resolving disputes between different groups.
If the parties are unable to amicably decide who gets what, the final resort is a court-mandated decision, which could be costly. This outcome may not best suit your needs. Courts may simply provide a 50/50 split regardless of any disputes.
5. Cool Down Period
It is often best not to negotiate who get’s what if either party is still angry. For example, it wouldn’t be the greatest idea for Liz to ask Phil to leave TransPerfect whilst kicking him with her shoe. If tensions are running high, a resolution that satisfies both parties is unlikely to occur.
In business, if a company is attempting to distribute assets it is best to allow for a “cool down” period. Allow emotions to settle down, and go into negotiations with a clear head. For instance, when distributing clients it is in everyone’s best interest to allow the parties to agree to not start an all-out rush for clients. Doing so could lead to an all-out war.
However, after allowing a “cool down” period, each partner can go into negotiations with a clear head, and allow for any non-designated clients to be reasonably taken from either partner. This “cool down” period can allow everyone to negotiate and argue for whichever client amicably.
It is important that any Dissolution Agreement contains provisions that leave little to the imagination, encompassing a variety of scenarios. For the same reasons that a cool down period is necessary, a clear and fully integrated agreement is necessary.
The situation may be tense, and it is important to know how everything is divided going into the process. If you don’t, you may end up like Liz and Phil. So plan ahead, lawyer up, and prepare for all scenarios.