Navigating a business divorce can be an incredibly difficult, stressful experience. It involves the displacement of partners, the disruption of operations, and financial loss for all parties involved.
Unfortunately, these kinds of disputes are not uncommon in business relationships, whether due to irreconcilable differences between co-owners or conflicting visions of how to move the business forward. As a business owner, it’s important to protect your interests when facing a business divorce and understand the legal process for settling disputes.
This guide will provide an overview of how to navigate the process and our Phoenix business divorce attorneys protect your interests.
Call our firm today at (623) 300-2727 for more information!
What is a Business Divorce?
Business divorce is a process of separating a business partnership or partnership interest. This can involve any number of partners, from a Limited Liability Company (LLC) with multiple members to a single-member LLC. It can also involve non-corporate structures such as sole proprietorships and general partnerships. Typically, the parties involved in a business divorce process are unable to reach an agreement and must resort to legal action in order to dissolve the partnership.
Generally, in order to protect their interests, parties involved in a business divorce should consider signing a non-compete agreement and determining the separate property, real estate, and other assets to be divided in a business divorce approach or asset approach.
Common Causes of Business Divorce
Business divorces can arise for a number of reasons, however, the most common causes include:
Irreconcilable Differences Between Partners
Dissolving a partnership due to incompatibilities o irreconcilable differences is often the most common reason for business divorce. It could be that the partners have different ideas about how to move the company forward, or simply no longer see eye to eye on key issues.
Disagreements on Management Decisions
Disputes over how to run the business can lead to a breakdown in communication and, ultimately, a business divorce. These disagreements range from budgeting and operations decisions to strategic planning and organizational structure.
Financial disputes can lead to a business divorce if one partner believes the other has mismanaged funds or resources. This can lead to distrust between partners as well as legal action in some cases.
Business divorces can also arise due to personal disputes between partners. This could be anything from a disagreement over the direction of the business to a difference in work ethics and lifestyles.
Dissolution of the Business
Business divorces can also occur if a partner decides to dissolve the partnership. This could be for any number of reasons, from retirement to bankruptcy.
Preparing for a Business Divorce
If you are facing a business divorce, it’s important to take the necessary steps to protect your interests. This involves understanding the legal process and preparing yourself and your business for the transition. Here are some tips to help you prepare:
Gather all Relevant Documents
This includes business or company documents, financial records, and contracts. Make sure to keep them in a secure place so that they are accessible if needed.
Talk to an Attorney
Reach out to an experienced attorney who is familiar with the legal process of dissolving a partnership or LLC. A lawyer can help you understand your rights and options during a business divorce.
Related Content: Alternative Dispute Resolutions For Business Divorce
Analyze Your Financial Situation
Take an in-depth look at your finances to understand the potential impact of the business divorce on you and your business. This includes expenses, liabilities, and any other sources of income.
Develop a Strategy
Once you have all the necessary information, start to develop a strategy for resolving the dispute. This includes understanding what kind of settlement you are willing to accept and which terms you are unwilling to negotiate on.
Issues to Consider Before a Business Divorce
If you find yourself in the midst of a business divorce, there are several potential issues to consider before proceeding. These include the following:
Determine Who Owns What
Before beginning the process, it’s important to determine who owns what within the partnership. This includes assets such as property and equipment as well as intellectual property rights and other contractual obligations.
Consider a Buy-Sell Agreement
A buy-sell agreement can be used to protect all parties involved in the business divorce. These agreements outline the terms of separation and specify how ownership will be divided among partners, as well as any other details related to the dissolution of the partnership.
Take Steps to Minimize Damage
It’s important to minimize any potential damage that could arise from the business divorce. This may include taking steps to protect customer relationships, minimizing disruption of operations, and ensuring that all financial obligations are met.
Division of Assets
This is an important part of navigating a business divorce and, there are two approaches that can be taken: an asset approach or a business divorce approach. In the asset approach, the assets are divided according to their market value. This can be done through an appraisal or a third-party mediator.
In the business divorce approach, the assets are divided according to contributions each partner has made to the business. This can include investments, future earnings, or other considerations. Commonly, these assets include:
- Financial assets, e.g., bank accounts, investments, and any other financial assets the business
- Intangible assets, e.g., goodwill, intellectual property, and customer lists
- Tangible assets, e.g., buildings, land, furniture, equipment, and inventory
- Liquid assets, e.g., cash and cash equivalents
- Physical assets, e.g., vehicles, tools, and machinery
- Other relevant assets, e.g., licenses, permits, or contracts
How Your Type of Ownership Will Affect the Split
The type of business structure you are operating under will have an impact on how the business divorce is handled. In fact, the laws and regulations that govern partnerships, LLCs, and other business entities vary from state to state.
If your business is structured as a Limited Liability Company (LLC), then it’s likely that each partner owns a specific percentage of the company. Depending on state law, partners may be able to buy out each other’s shares or the company may be required to liquidate assets in order to pay out each partner’s portion.
In a corporate structure, the dissolution of the company is usually handled in accordance with state law. This typically involves distributing any remaining assets among shareholders and liquidating any remaining liabilities.
Sole Proprietorships and General Partnerships
In sole proprietorship and general partnership structures, any business assets are typically split among the partners in accordance with their ownership percentage. This may involve a buy-out of each partner’s portion or liquidating certain assets to cover debts or other obligations.
Limited partnerships may be dissolved if all the partners vote to do so or the court orders it in certain circumstances. In this case, any remaining assets are distributed among the partners according to their ownership share, and any debts are paid off from these proceeds.
Limited Liability Partnership
In a limited liability partnership, the dissolution of the partnership is typically handled in accordance with state law. This usually involves distributing assets among partners and liquidating any remaining liabilities.
Learn More: How to Protect Your Business After a Partner Leaves
Methods to Consider For a Business Divorce
There are several methods you can consider when navigating a business divorce.
Mediation is an effective way to resolve disputes quickly and without the cost of going to court. It involves having an impartial third party help facilitate negotiations between all parties involved in order to reach an agreement.
Arbitration is similar to mediation, however, it involves an arbitrator (or panel of arbitrators) issuing a decision based on the facts and evidence presented. This can be an effective way to resolve disputes without having to go through the court process.
If all other methods fail, then business litigation may be necessary. This involves filing a business divorce lawsuit against the other party and having the dispute settled in court. It can be an expensive process, however, it’s often unavoidable if there is no agreement to be reached.
Buy Outs or Selling to a 3rd Party
Another alternative option is buying out the other partner’s share of the business, selling your business to a third party, or splitting the business assets among partners. A buy-out involves one party purchasing the other’s share of the business. This can be done through a cash buy-out or a stock transfer.
A third-party sale involves finding an outside investor to purchase the business. Finally, splitting business assets allows each partner to receive their share of the business assets and move on. It’s important to keep in mind that each buyout option has its own risks and benefits, so it’s important to take the time to weigh all options carefully.
Get an Up to Date Business Valuation
Before any agreement is made, it’s important to get an up-to-date valuation of the business. This will help you determine the fair market value of the business, as well as any potential liabilities or assets. A professional appraiser can provide an objective assessment of the business value and can be an invaluable resource in a business divorce.
For example, if one partner believes they are entitled to a certain amount of money or assets, an appraiser can provide an objective opinion on the matter.
Get Legal Representation
Navigating a business divorce is never easy, but taking the necessary steps to protect your interests can make the process smoother and more successful. It’s important to seek legal counsel to ensure that your rights are protected and that any agreements are in your best interest. Our business law firm has extensive experience dealing with business divorce disputes and can provide you with the help you need to protect your interests.
Our experienced business divorce lawyers can provide guidance on the legal process and help navigate negotiations with the other party. For us, your business is our priority and your interest is our top concern. Book a quick consultation today to get started.