Ending a Business Partnership
By Curtis L. Golkow
Ready to Divorce Your Business Partner? When times are tough, even healthy business relationships can become strained, and incompatibilities between business partners may surface. If you're ready to dissolve your business partnership, the economic downturn may have actually made it easier to get out.
When times are tough, even healthy business relationships can become strained, and incompatibilities between business partners may surface. Challenging times will force business owners to consider measures for short-run survival, revisit their strategy for long-run success, assess their own and their partner’s contributions and commitment to the business and generally reexamine their priorities. Through this process, business owners may come to realize how they differ in visions for the business, risk tolerances, levels of commitment or values. The partner who is willing to work harder or contribute more to the business may grow intolerant of the one who will not carry his or her weight. For these reasons and others, economic woes often cause business owners to seek a business divorce.
Controlling Business Owner’s Perspective
While the decline and volatility of the stock market and real estate market may have many investors wondering where to put their money, the answer should be obvious for many business owners with a majority or controlling interest: it is time to invest more in their own company. With business valuations at their lowest levels in years, what better opportunity will the controlling business owner have to buy out a minority business partner?
The buy-out of a minority owner often may be achieved without the minority owner’s consent. Depending on the type of business entity, state of incorporation or formation, and various other factors involved, the controlling owner may have the ability to squeeze-out the non-controlling owner through a merger, share exchange, reverse stock split, redemption or other transaction that would compel the non-controlling owner to sell or extinguish his or her interests. If there is a shareholders agreement, LLC operating agreement, partnership agreement or other “pre-nuptial” agreement between the business owners that requires a buy-out upon termination of the non-controlling owner’s employment or some other triggering event, the controlling owner may wish to pull the trigger.
If, however, the “pre-nuptial” agreement between the owners prohibits or impedes the controlling owner’s forcing a buy-out, techniques that otherwise might be considered “oppression” of the non-controlling owner might be justified. After all, in an uncertain economy, might it not be prudent for management to reduce or eliminate dividends or distributions, or to reduce salaries or other compensation? These actions might benefit the company and, at the same time, induce a non-controlling owner to succumb to the controlling owner’s desire to buy.
Additionally, if declines in the stock market or real estate values have put the non-controlling owner in a cash squeeze, the controlling business owner might have extraordinary leverage. With aid from the troubled economy, the controlling owner may be able to negotiate a buy-out of the non-controlling owner without having to resort to tactics designed to increase bargaining leverage.
Non-Controlling Business Owner’s Perspective
For the non-controlling business owner who has been waiting for an opportunity to exit, economic difficulties may present a unique opportunity. Absent some special right in the shareholders agreement, LLC operating agreement, partnership agreement or other “pre-nuptial” agreement between the business partners to sell, the non-controlling owner typically has no way to force a buy-out of his interests. The controlling owner, knowing that the non-controlling owner is trapped, generally offers a low price and unfavorable terms – if he makes any buy-out offer at all. In most situations, the law protecting non-controlling owners does not provide rights sufficient to enable non-controlling owners to exit from the company on fair and reasonable terms.
A troubled economy may create opportunities for the non-controlling owner to improve his negotiating leverage. If the company is experiencing strained relationships with the bank, key customers or vendors or other important contacts, the business and its controlling owner may find themselves in a vulnerable position. Furthermore, if the controlling owner desires to make major changes to adapt to economic conditions, the non-controlling owner may be in a position to challenge those initiatives. Conflicts between business owners often are highly disruptive to the business and can cause a loss of valuable relationships, and sometimes even jeopardize the company’s viability. In short, economic adversity may put the non-controlling owner in an unprecedented position of leverage, giving the controlling owner reason to negotiate a fair and reasonable buy-out.
While the current economy has business owners nervous and investors unsure of their next move, the opportunity for business partners to separate from each other may have improved. As a business owner assesses how the current economy is affecting his business, he or she also should consider how current conditions have influenced negotiating leverage with the business partner and whether the time is right to initiate a business divorce. A business owner who wishes to take advantage of the economic downturn and separate from his or her business partner should develop a strategy now with the advice of counsel experienced in business divorce matters to seize this valuable opportunity.
Curtis L. Golkow, a partner with Fox Rothschild LLP, has been practicing corporate, securities, and finance law for more than 20 years, negotiating business deals and commercial matters for entrepreneurs, emerging companies, investors, lenders, and middle-market companies across a wide variety of industries. He can be reached at 215.299.2747 or [email protected].