5 Tips for Cutting Ties With a Business Partner
Anyone embroiled in a dispute over the management of the business with a partner understands why business lawyers refer it as a “business divorce.” The partners often work together to build the business, investing significant amounts of time as well as their financial and/or sweat equity.
A business partner may feel that the other doesn’t do a good job managing the business or isn’t pulling their weight. It is also common for partnership disputes to turn personal quickly when business partners especially in small businesses have a preexisting relationship (albeit professional, familial, or social).
Becoming resentful of your business partner is a sign that it’s time to consult with a business divorce lawyer to explore your options. If you are asking yourself “How can I resolve my disputes with my business partner?”, you can increase your chances of reaching a resolution with your business partner by doing these five things:
1. Execute an Agreement Among the Owners As Soon as You Create the Company
It is a good investment of time and money to sign a business partnership agreement when the company is created that defines each owner’s or shareholder’s rights and obligations.
Shareholder Agreements, operating agreements, and partnership agreements, if properly structured, detail how the company will be managed and should lay out the percentage of shares or ownership interests needed to make certain decisions, with some minor decisions perhaps requiring a simple majority and others requiring a supermajority and even unanimous consent. These agreements should also direct whether the owners are permitted to voluntarily exit without dissolving the business, how shares will be valued, and how disputes over valuation or otherwise will be resolved if one owner wishes to withdraw.
Suffice it to say these agreements can be complex, so consider hiring a business lawyer to help negotiate the finer points and protect your interests.
2. Gather Corporate Governance Agreements
At the first sign of a dispute, make sure you have a copy of the controlling management agreements. For corporations, those would be the bylaws and a shareholder agreement, for limited liability companies, make sure you have signed an operating agreement, and for true partnerships, be sure that the terms of the arrangement are detailed in a written partnership agreement.
If you don’t think you’ve executed one of these documents, think again. Many companies that are started by online services like Rocket Lawyer, Legal Zoom, Inc Authority, Harvard Business Services, and the like will sometimes include boilerplate drafts of these documents as part of their services. So, it is possible that there is an agreement out there and it may control even if it was not signed by all parties. If you are unsure, show any draft agreements to your business lawyer.
3. Gather Financial Records
If you suspect your business partner is mismanaging the company’s finances, start gathering company credit card and bank statements, financial statements, and general ledgers.
Often these documents reveal evidence of corporate waste, your partner using company funds to pay for personal expenses, or your partner making unauthorized distributions to themselves without the required vote.
It is common for one business partner to cut off the other business partner’s access to those accounts at the first sign of a problems. That is especially true if one business partner is tasked with the day-to-day operations of the business. While it may be wrong for the partner to do so, getting access restored can consume a significant amount of time which will delay resolution.
So, be sure to secure copies as soon as you can and make sure you keep them confidential.
4. Consider Potential Resolutions
Owners or investors who’ve had enough of their business partners usually only focus on cutting ties but never consider what a clean break looks like.
It is also possible that if you can’t agree on a resolution that the business will be dissolved—a frustrating and expensive process in which a court will untangle the affairs of the business partners.
If you want to avoid the hassle and cost of dissolution, would you be comfortable exiting or do you think your business partner should be forced to hit the road? Either way, how much should the withdrawing owner be paid for their interest if anything at all? Should they be forced to comply with a non-solicitation agreement in their employment agreement or in the operative management documents? Will one of the owners resign as an officer, board member or manager and, if so, who will replace them? These are just a few of the things to consider as you contemplate a resolution.
For as upset as you are, start considering and ranking acceptable outcomes so your business divorce attorney can tailor an appropriate negotiation strategy.
5. Send a Demand Letter
Now that you have gathered this important information and discussed a strategy with your business attorney, the next step is to detail all of the things your business partner has done wrong or has not done at all.
Normally, a business attorney will do this through a demand letter that details of all of your partner’s malfeasance (that’s a fancy word for bad acts or failures), their potential liability, and, depending on the circumstances, how you propose the disputes should be resolved without needing to start a lawsuit. In the end, your partner should understand what they have done wrong and should worry that you are moments away from commencing arbitration or litigation if the demand letter is crafted properly.
If the parties reach a settlement, it should be memorialized in a settlement agreement and other ancillary documents. For example, if one shareholder will sell their shares to another, a contract evidencing the sale and assignment of shares should be negotiated at the same time.
But if the parties cannot reach a resolution, don’t fret as the demand letter will be put to good use. Indeed, your business litigation lawyer use it to start the complaint that will be filed in court, or the demand or mediation statement that would be filed in arbitration or mediation, respectively.
If your relationship with your business partner is strained or if you’ve had enough and are ready for a business divorce, these 5 tips are a good start to allow you and your business attorney get started to reach a resolution.
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