Lessons Learned From a Business Divorce

Few entrepreneurs (if any) enter a business relationship with the notion that the enterprise will end acrimoniously. If you see that as a real possibility in the beginning with your business, you might want to rethink the arrangement. Likewise, the excitement and adrenaline an entrepreneur experiences when starting out will often blind him/her from acknowledging the possibility of serious disagreements in the future. There is a likelihood that you and your fellow business partner or owner will need to confront difficult issues at some point… and you may not always agree. 

 

The key is anticipating reasonably foreseeable disputes and proactively implementing appropriate and customized governance, decision-making, and valuation provisions long before issues occur. Simply having an agreed-upon framework from which decisions are made can often prevent many disagreements (because there was a mutual understanding on how decisions would be made in the first place). Likewise, setting up things like vesting will help prevent undesirable situations (e.g., one partner failing to pull their weight in work).

 

Anticipate the Unexpected

 

Pondering disputes when everything is fine could feel awkward, but the venerated quote from John F. Kennedy rings true: “The best time to repair the roof is when the sun is shining.”

 

Making decisions when you or your business partner are angry and frustrated rarely, if ever, yields positive results. Those feelings are hard to escape when you are actively contemplating a business divorce. Being proactive about governance, decision-making, and valuation methods within your partnership or operating agreement will help you retain any leftover goodwill and, instead, focus on confronting the problem. 

 

Lead With Your Values

 

No matter which provision you and your business partner are negotiating, lead with your shared values and vision. If a future issue does threaten the viability of your business, consider the optimal outcome.  Also consider how the decisions will be made in such circumstances.  Will there be one partner who gets the ultimate decision making authority?  Or does it truly require majority (or if there are only 2 partners, unanimous) consent?  There isn’t necessarily a right answer to these questions.  But, partners need to understand (and more importantly, be comfortable with) the framework and the risks associated with it.  

 

The Virtues of Avoiding Litigation and Formal Dispute Resolution 

 

Frankly, if your business divorce is coming to formal dispute resolution, whether it’s arbitration or litigation, it’s not likely to end well for either party. Once you are in the formal dispute resolution process, you’re adding significantly more time and significant fees to attorneys and experts. Arriving at a deal with your partner before engaging in formal dispute resolution is typically the best outcome for both parties, as it often saves significant time and expense. Proactively salvaging amicable relations could yield dividends for your entrepreneurial career in the future.  That said, sometimes, dispute resolution or litigation is the right path.  But, in my opinion, you should explore all other avenues first.  Litigation should be the last resort.  

 

Be Mentally and Emotionally Prepared

 

Even the best operating agreement will not necessarily make the business divorce itself any better. You will still be mentally reckoning with the end of a significant entrepreneurial undertaking, and you should prepare appropriately. Still, an underlying framework for efficiently dealing with the exit is important. A poorly drafted operating agreement (or no agreement at all) often leads to a messier breakup. Read more about a thoroughly drafted operating agreement.

 

Lean On Your Professionals

 

Starting a business should not happen without experienced legal counsel. Doida Crow Legal appreciates the importance of thorough operating and partnership agreements and would be honored to help you implement time- and money-saving provisions in your company’s underlying contracts. 

We offer an array of fee options to provide you with financial certainty. Let’s talk about your company’s legal needs today.

 

 

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