In this week’s Freedom Friday blog and email newsletter, I want to talk about a topic that I’ve discussed before, but I do not get enough questions about from prospective clients. Every year I get asked about partnership dissolutions and disputes. Even if your partnership is structured as an LLC (a multi-member LLC), I get a lot of questions of how to break up the partnership or business relationship, but not enough questions, because usually by the time someone contacts me about his or her partnership dispute issue, its too late, and the pre-planning has not taken place (and cannot take place). Many partnership disputes can be avoided by pre-planning in advance. If you are considering initiating a business divorce for any reason, you need to plan in advance, and that’s what we’re talking about in today’s Freedom Friday blog and email newsletter. In today’s Freedom Friday blog and email newsletter, I’m answering the question, “What should you consider before breaking up a business partnership?”
There are several factors you should consider before breaking up a business partnership. Many times, clients come to me to assist in a business divorce where none of these factors have been considered but if even some of these issues were considered and thought out in advance, a business divorce could be more amicable and better for all involved. Here are five (5) issues to consider before breaking up a business partnership:
1. Start with the Operating Agreement
The first factor you should consider before breaking up a business partnership is the operating agreement (or partnership agreement or another governing document). Many business “partnerships” are not structured as “partnerships” but as LLCs or other business entities. If the “partnership” is an LLC, you need to consider the operating agreement. If you are considering leaving the business (or the other party is), the operating agreement should have a procedure in place for that situation. This is the roadmap which you need to follow if you are going down the road to business divorce. If the operating agreement is silent on this issue, then you can seek judicial dissolution through the courts, but should not be your starting point.
2. Survival of the Business
The second factor you should consider before breaking up a business partnership is the survival of the business. You need to consider who controls banking, vendor relationships, and client relationships. If that person is you, will the business be able to survive after the other business partner leaves? If that person is the other business partner, will you be able to continue the business in his or her absence? If not, the business may come to an end, or you may need to restart the business separately which can cause significant disruptions with clients.
3. Value of the Business
The third factor you should consider before breaking up a business partnership is the value of the business. Many operating agreements determine in advance how the business is valuated if a business partner needs to leave the business and gives a buyout procedure. It is wise to decide in advance how the company’s value will be appraised: book value, CPA, asset basis, etc. Perhaps you and the departing business partner can decide amicably on the method of valuation to assist in determining the value of the business.
4. Document Everything
The fourth factor you should consider before breaking up a business partnership is that you need to document everything. Every document, email, text message may matter later. If you’ve been operating in an informal manner, start documenting your meetings, finances, and communications.
5. Identify Your Goal
The fifth factor you should consider before breaking up a business partnership is to identify your goal. This is not the first factor, because you really need to begin with your operating agreement, but if you’ve considered that and the other factors, you should identify your goal, be it a buyout, dissolution, or restarting your business independently. From this goal, you can develop a plan to hopefully reach an amicable solution with the departing (or remaining) business partner(s), and not end up in an expensive business divorce case in court.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at Jonathan@libertylegalok.com to schedule a FREE consultation.
For more information about Liberty Legal Solutions, LLC, please visit our website at https://www.libertylegalok.com/