Lawyers call it a “business divorce,” when the owners of a small business begin to fight over the business. This might sound melodramatic—until you’ve been through one. Like a divorce, it combines money, personal relationships with people you (used to) trust, and something you to which you feel emotionally attached—your business.
Business divorces are fairly frequent. Sometimes one or more owners are pushed out (with varying degrees of compensation), and sometimes the business is split up in some way. Sometimes the business recovers; sometimes it doesn’t.
A lot of things can bring about a business divorce:
- A member might be fed up and try to start a competing business, or just get fair value for her ownership interest.
- A member might be “frozen out” of the decision-making but unable to sell out reasonably.
- There might be an out-and-out contest for control, or a straight-up dispute about direction, particularly when outside investment or asset sales become possibilities.
- There just could be personality disputes among the owners.
- An owner might die, and the inheritors might not fit in well with the surviving owners.
The common denominator is the lack of a realistic market for the ownership interest and difficulty valuing the company (i.e., you can’t just sell your interest and get fair market value for it), leaving owners with an unhappy choice of (a) leaving a lot of money (and blood, sweat and tears) on the table; (b) being completely miserable; or (c) suing.
Business divorces are also legally complex. There are three overlapping sources of law to consider. First, there’s the Operating Agreement or Shareholder Agreement, which governs the owners’ relationship with each other. You entered into one, right? Alas, even if you did, it might be perfunctory or just out of date: After ten years, is your business much like what you expected it to be when you started? Chances are, your agreement didn’t evolve along with your business.
Then there are the ancient “fiduciary duties” of loyalty. These can get tricky because you owe some of these duties to the other owners (and vice versa, of course), but some are owed to the corporate entity itself. Since control of the corporate entity is often what’s at stake, it can be a more than a little unclear who can enforce those duties.
Finally, there are the statutes that enable the corporate entities themselves.
When a dispute arises among business partners, it can get personal and lead to protected litigation. As we explain in this primer, lawsuits are not an entirely pleasant way to resolve disputes, even under the best of circumstances.
The best way to deal with business divorces is to avoid them entirely, and that means investing the time and money in a robust operating or shareholder agreement, keeping the agreement relevant as the business evolves, and keeping the lines of communication open. Even then, like any marriage, divorce may be unavoidable.
Rick Sanders Law understands that getting out of a business can be just as complex as getting into one, if not more so. Contact us now, and we’ll help make that process as painless as possible.