COURTESY / PRETI FLAHERTY
Sara Moppin is a partner at Preti Flaherty.
January 12, 2021
It's complicated: How to break up with your business partner
By Sara Moppin, Preti Flaherty
As the old Neil Sedaka song goes, “breaking up is hard to do-oo.” Ending a romantic relationship is hard but breaking up with your business partner can be even harder. Here’s how to manage a business break up and come out unscathed, or at least minimize the emotional and financial damage.
Consider whether a break-up of the business is the best option
The first consideration is what’s at the heart of the dispute between the partners. Are the partners at an impasse on a fundamental business decision? Is one partner not carrying his/her weight? Do the partners disagree about the future direction of the company? Is the company in financial trouble? Would the engagement of a professional manager, consultant, or CEO to take some of the pressure off the partners? Once you understand what’s causing the friction, consider whether there’s a way to lessen or eliminate it.
If the partnership is truly unworkable, consider what the break-up might look like. Options might include dividing the assets among the partners and each going separate ways. Liquidation is another option, as is a sale to a third party. Or one partner could buy out the other partner or partners. Consider what your objectives are and what makes sense for you and the company going forward.
Talk to your partner. Is he/she on the same page as you in terms of his/her thinking about what’s at the heart of the dispute and what the break-up might look like? The importance of open and honest communications among the partners can’t be stressed enough.
Review your partnership agreement
If you have formed a company for the partnership, do you have an agreement that defines the roles and responsibilities of the partners and spells out how to break deadlocks among the owners? If so, dust it off and read it carefully. Your partnership agreement may provide rights or obligations that you didn’t know you had. You’ll also want to review the partnership agreement to see if it includes any provisions spelling out how each partner’s equity will be valued in the event of a break up.
If you don’t have any kind of agreement with your partners, you’ll need to understand what statutory or common law rights apply. If the partners are at a complete impasse and your company has not adopted any deadlock breaking mechanisms, judicial dissolution by a judge may be your last resort.
Exercise your rights to access company books and records
If you have concerns that your partner may be mismanaging company funds or property or is not operating the business in compliance with law, you need to act right away. Check the company bank account frequently. If you don’t have access, get access. Exercise your statutory rights to review company books and records. Complacency on this front can be costly.
Consider how you will finance the breakup
If a buyout is in the works, you’ll need to consider how to pay for it. Depending on your circumstances, bank and private loans for a partner buyout may be impossible to obtain. Do you have cash to pay at closing? Or will you finance the buyout by making payments over time via a promissory note? If this is the plan, how will those payment obligations be secured to make sure you get paid on time and in full?
Ask for help
Don’t be afraid to ask for help. If you’re struggling to come to terms with your partner or to understand your rights and obligations or to implement your next steps, reach out to your accountant, business lawyer or other trusted advisor. Having a fresh set of eyes review the situation may help you take the emotion out of the situation, avoid unnecessary conflict, and more quickly move forward with the next chapter of your professional life.
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