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There is a point in almost every business relationship where the partners have to make an important decision: Are we still on the same page?
Sometimes the answer is yes. Sometimes it is a very clear no.
Perhaps one partner wants to retire while the other wants to keep growing the business. Maybe one person feels they are doing more than their fair share. Perhaps the partners no longer agree about how the business should be run. Or, sometimes, a relationship that started over coffee, a handshake and a great idea has simply run its course. Whatever the reason, separating business partners can be complicated.
We often think of a business divorce as being about money. In reality, it is usually about much more than that. It can involve relationships, control, future plans, employees, customers, intellectual property, company assets, and sometimes years of history.
The good news? A business breakup does not have to become a legal battle.
The key is understanding your rights and obligations, having the right agreements in place, and getting legal advice before the relationship reaches the breaking point.
“Business divorce” isn’t a formal legal term. It is simply a useful way of describing the process of separating business partners when they no longer want, or are no longer able, to continue working together.
It can happen for many reasons:
Whatever the reason, the legal question is often the same:
How do we separate our interests in the business fairly and practically?
This may sound obvious, but it is one of the most important lessons in business law. When business partners are getting along, it is easy to say, “We’ll figure it out if we ever have a problem.”
We understand the sentiment. When you are excited about building a business together, discussing what happens if the relationship falls apart isn’t exactly the most enjoyable conversation. But that is precisely when the conversation is easiest to have.
A shareholders’ agreement can establish what happens if one shareholder wants to leave, dies, becomes disabled, receives an offer for their shares, or has a serious disagreement with the other shareholders.
Depending on the circumstances, the agreement might address:
A well-drafted agreement can turn a potentially emotional and expensive situation into a process everyone already understands.
In other words, you don’t create a shareholders’ agreement because you expect your business relationship to fail. You create one because you hope it doesn’t—and you want to protect everyone if circumstances change.
This is where things can become considerably more complicated. Without an agreement setting out how an exit should happen, the parties may have to rely on the company’s governing documents, applicable legislation, common law principles and whatever other agreements exist between them. That can leave important questions unanswered.
For example:
Can one shareholder simply leave? Not necessarily in the way they might imagine.
Can one shareholder force the other to buy their shares? That depends on the circumstances and the applicable legal rights and agreements.
Can one shareholder sell their shares to someone else? Again, there may be restrictions or other considerations.
How much are the shares worth? This can become one of the biggest areas of disagreement.
And perhaps most importantly:
Who gets to decide what happens next?
When the relationship has already broken down, not having clear answers to these questions can make an already difficult situation much harder.
One of the biggest challenges in a business separation is determining what the departing owner’s interest is actually worth. This sounds straightforward until you start asking questions.
Is the business being valued based on its assets? Its income? Its future earning potential? Its customer relationships? Its intellectual property? Its reputation And what happens if one shareholder believes the business is worth $2 million while the other believes it is worth $1 million?
There may be different approaches to valuation depending on the nature of the business and the circumstances of the separation. Sometimes an independent business valuator or other financial professional will be involved.
The important thing is to avoid leaving valuation methodology until the relationship has broken down.
Agreeing on the process in advance can save significant time, money and frustration later.
A business separation is not simply about deciding who gets the shares.
You also have to think about what happens to the business itself.
For example:
These details can be particularly important for small businesses, where the owners may also be the people responsible for virtually every aspect of the business.
A departing shareholder may have spent years building customer relationships, developing intellectual property or becoming the public face of the company. Untangling those connections can be much more complicated than simply transferring shares.
Sometimes, despite everyone’s best efforts, the relationship cannot be repaired. At that point, the goal should usually be to find a practical path forward. That might involve one shareholder buying out another. It might involve selling the business entirely. It could mean restructuring the company or negotiating another arrangement that allows both parties to move forward separately. The important thing is to resist the temptation to let emotions make the decisions. This can be particularly difficult when business partners are also friends, family members or spouses. A disagreement about a business can quickly become a disagreement about much more.
Having lawyers involved does not necessarily mean the situation is headed for court. In fact, early legal advice can sometimes help prevent a dispute from getting there in the first place.
A lawyer can help identify the legal issues, explain each party’s rights and obligations, and help negotiate a solution that allows everyone to move forward.
No one starts a business with a friend or colleague thinking, “I can’t wait until we eventually disagree about money, control and the future of the company.”
You start because you believe in the business, and in each other. But businesses change. People change. Priorities change.
The partner who was ready to work 70 hours a week five years ago may now want more time with their family. The person who wanted steady income may now want to aggressively expand. One partner may want to sell while the other wants to build for another decade. None of these necessarily means someone did something wrong. Sometimes, it simply means the people who started the business together are no longer heading in the same direction.
Planning for that possibility isn’t pessimistic. It’s good business.
A thoughtfully prepared shareholders’ agreement can give business partners a roadmap for dealing with difficult situations before they become crises. And if you are already facing a business separation, getting legal advice early can help you understand your options before positions become entrenched.
A business partnership is a relationship. Like any relationship, it can change over time.
The best business divorce is often the one that never becomes a fight.
Whether you are starting a business with a partner, considering buying out a shareholder, or already facing a disagreement about the future of your company, having a clear understanding of your legal rights and obligations is an important first step.
Because when business partners want out, the goal isn’t necessarily to decide who wins. It’s to find a way for everyone to move forward.
At GBC Law, we help business owners navigate the legal issues that arise throughout the life of a business. From getting started and structuring the business to negotiating agreements and navigating changes in ownership. If you are considering entering into a business partnership or are facing a difficult separation, getting legal advice early can help you understand your options and protect what you have built.
