While no one goes into business expecting to have to “breakup” with their business partners, it is something that all business owners should plan for, just in case. Business relationships fail for many different reasons. Business partners may have long-term disagreements, a change in leadership, or simply a desire to go in different directions. While the break up may still be hard, there are some things business owners across Virginia can do to help prepare themselves for the end.
First, it’s important to realize there are different ways a business breakup can go, depending on the circumstances. For example, one business partner may want out of the business, but the remaining partners want to keep the business going. Alternatively, all business partners may decide to just get out of the business altogether. If the business is ending altogether, the company will go through business or partnership dissolution and eventually termination. Business dissolution is the “winding up” of affairs of the business, before the business actually terminates. This phase typically includes paying all outstanding debts and liquidating or distributing remaining assets of the partnership. Termination of a business is when the entity ceases to legally exist. There may also be differences in the process depending on the specific entity your business is structured as. The dissolution of a stock corporation won’t look the same as the dissolution of a general partnership or limited liability company (LLC). (In this article I often use “partner” and “partnership” loosely and am not referring to an entity structured as a partnership.)
Many questions arise when ending a business relationship, such as how to divide the partnership’s assets, can one business partner carry on the business without the other, who can buy an ownership interest, and how to value shares. Ending the relationship will go much more smoothly if these issues are discussed before there’s a problem, rather than having to decide them once issues already arise.
How to Prepare for a Business Breakup?
Most importantly, a strong offense is the best defense. The best strategy to avoid a bad business divorce is to have strong governing documents (such as operating agreements, partnership agreements, and shareholder agreements) clearly outlining the rules for separation of business owners. A well-drafted agreement can help to prevent a deadlock from occurring over disagreements about how to end the relationship. Another important document to consider is a buy-sell agreement. A buy-sell agreement discusses conditions surrounding a partner’s exit and considers issues such as when a buyout is triggered, how to value shares, and who can and can’t buy into the business in the event you or another owner want out. This creates additional protections for the remaining partners against unwanted partners.
If business partners decide to dissolve the business so it no longer exists, a dissolution agreement can help simplify the process. A dissolution agreement sets out important terms for the dissolution, including a timeline for the process and the duties of each partner.
You can find more information about business breakups, here.