Business Partnership Divorce

Though you started out as best friends, spouses, siblings, or college roommates, you and your business partner(s) now have each other’s headshot on a dartboard.  You’re losing sleep, the company is losing clients, patience is wearing thin, and everyone is nearing the end of their respective ropes.  You’re hoping your partner simply disappears over the Bermuda Triangle, but that’s not a realistic outcome.  What options do you have?

First, acknowledge that this is pretty common.  Owning a business with someone is just like being married, without the fringe benefits (well, most of the time).  Given the failure rate of marriages, it’s no surprise that business partnerships often succumb to similar pressures.  Partnerships can crumble when the business is making lots of money or no money at all, when the industry is booming or when regulations have forced a pivot, when employees are the bane of the company’s existence or when the employees are the beating heart of the entire operation.  There is almost no telling if or when a partnership might hit the skids, so what’s an owner to do?

For starters, EVERY company should start off with owners’ agreements (AKA shareholder agreements, operating agreements, partnership agreements, depending on the type of entity), to outline the owners’ respective roles and responsibilities and determine how decisions are made.  Most importantly, as with a concert venue and any contract, the exits must be clearly marked.  How does one get out of the company? What if one partner is sabotaging the company – can that partner be kicked out?  How much is that partner’s interest worth?

Too many companies forego the time and expense of putting together an owners’ agreement, to their detriment. Our blog is filled with horror stories involving companies without a written agreement.

Even WITH a written agreement, partners may find themselves at odds over company decisions, how company money is spent, how involved a partner’s spouse is in the management, or conflicting interpretations of the agreement’s language. Often, the written agreement (especially if it’s a boilerplate version someone found online) doesn’t clearly or adequately address how the owners go about resolving disputes.

Nevada law, especially law on LLCs, doesn’t really fill the gaps in answering this question.  The dueling owners are then left with two choices – negotiate a resolution, or lawyer up and potentially file for judicial dissolution.

The traditional method of resolving a dispute among owners is that each owner retains his or her own lawyer and the lawyers do their lawyer thing.  Depending on the type of lawyer, this may very well involve keeping the parties at odds with one another, to rack up those billable hours.  Litigators make a lot of money from people’s fights, so I’ve found that many attorneys with this mindset aren’t crazy about trying to come to a swift, amicable resolution without going to court.

If you do end up in court (heaven forbid), the judge will NOT care that Bob showed up to work every day while Steve played golf, or that Judy sabotaged customer relationships while Sally scrambled to do damage control.  Nope, the court will judicially dissolve your company, paying off any creditors and distributing any remaining assets to the owners in proportion to their ownership interests, even if that ratio is a far cry from the actual division of labor.  If that isn’t bad enough, it will take the owners years and potentially hundreds of thousands of dollars in attorney fees and court costs to even get to that point, while the company suffers and the employees head for the door.  Depressing, huh?

After shepherding two different clients through partnership disputes the traditional way (short of litigation because we are NOT litigators and don’t pretend to be), I had an infomercial moment – “there’s gotta be a better way!”  That’s how we came up with the Business Partner Divorce Mediation service. For a flat fee and in three weeks’ time, you will either have a resolution, or you’ll know you gave it the ol’ college try and you can each hire a lawyer and don the boxing gloves.  The fee is a far cry from most corporate litigators’ minimum retainer but enough to keep the owners engaged, and the timeline is intended to focus everyone’s efforts (including ours) and give the owners a light at the end of the tunnel.  We have found that the more time the owners have to poll every sibling, cousin, frat brother, and neighbor about the situation, the more likely it is that someone will add fuel to the fire and derail any resolution process.  Plus, if your Google search landed you on this page, chances are you’ve lost sleep and gained blood pressure points over the whole situation, so a three week timeline puts some relief in sight.

For more information, and our Rules of Engagement, contact our office.