You Need to Divorce Your Business Partner. How Should You Do It?

You had a great run with your business partner, but all good things must come to an end. Now, you have to work out the exit from the partnership—what we call a “business divorce.” Just like divorces in family court, a business divorce may be straightforward, efficient, and amicable or contentious. How well your business divorce goes depends on several factors. 

What Does the Partnership Agreement Require?

Many times, the partnership agreement stipulates a certain method for a partner’s exit. Buyouts, sometimes called buy-sell agreements, are exceedingly common. These agreements often stipulate that departing business partners must first offer their ownership interests to the partner(s) who are staying with the partnership. A comprehensive buyout agreement lays out the methods for valuing the departing partner’s ownership. 

Apart from a buyout of the departing partner’s ownership interests, the partnership agreement might require dissolution of the company. This is a complex process that often involves, at a minimum, informal discovery (more on that below). If your partnership agreement has no information on the procedures for dissolution, you and your legal representation must consult relevant statutes and laws. A majority of business partners might need to approve the dissolution for it to even occur. Other professionals (apart from your lawyer) will need to be involved in dissolution proceedings. 

If you are not certain that you or another partner needs to exit, you should consider mediating the underlying dispute. However, disputes that reach the point of mediation are often beyond mending. 

Hurdles to Smooth Business Partnership Exits

Again, the absence of a buyout agreement or exit procedure in the partnership agreement will make the partnership exit more difficult. Otherwise, the attitude of each business partner heavily impacts the efficiency of the exit. 

If a partner suspects another one of abandoning their fiduciary duty or neglecting the business, the buyout could trigger fears that the departing partner’s ownership interests are worthless. Furthermore, the company could be insolvent. Why would the staying partner pay top dollar for the other partner’s interests?

Although litigation is presumed to be the last resort for warring business partners, it’s sometimes inevitable. Litigation kicks off the formal discovery process. Depending on your perspective, this can either be an expensive nuisance or a necessary path toward achieving your short-term business goals. 

One constant is that a skilled Arizona business attorney needs to be by your side. A great attorney can do much more than file motions in court and apply the law to your situation. The team at Monahan Law Firm is dedicated to the needs of our clients and is proud to provide a holistic approach to business disputes. To preserve your business and professional reputation, give us a call at (623) 385-3190 for a discussion with a mission-focused legal team.

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