Splitting From a Business Partner

Answer:

As a knowledgeable Delaware County Business Lawyer, clients come to me all the time with questions regarding how to go about splitting from a business partner. The first thing you need to do is determine whether your partnership is a corporation or an LLC (“limited liability company”). If you aren’t sure, this information can be found in your corporate formation documents. Go through the documents and look for any specific instructions relating to the termination of the relationship. The documents may include a whole list of agreements, including things like a buyer/seller agreement, confidentially agreement, shareholder agreement, employment agreements. These are agreements you and your partner have entered into during over the life of the company. When we as attorneys review these documents, we ask, “What do they provide when one member wants to leave, either voluntarily or involuntarily?” That becomes the key to the process. As a Proficient Delaware County Business Lawyer, I would say the key first step is reviewing what was outlined in the documents when the company was established. The next question you must ask is whether this is a voluntary dissolution. Are you on friendly terms and do both of you agree you want to split? A mutually agreed-upon split is much simpler than if there’s a disagreement between you over the end of the partnership. If you both agree, the first thing you want to do with that is divide the company voluntarily, as in, “I accept certain assets and you accept certain assets.” Next, together we pay off all the business debts and hopefully have a large sum of money left over afterward that you can divide. If both parties agree to dissolve, that’s the way to do it. You get an evaluation of the company and agree to split up the assets or sell the assets, pay off your debts, and then walk away. If, however, one member wants to stay and another wants to leave, it becomes a little more difficult because you need to negotiate the exit plan. If you’ve looked at your documents and they show how the break should happen, you’ve got a roadmap to follow. If there is no document in place, though, you’ll begin a series of negotiations with your exiting member to say, “I think the company is worth XYZ and my percentage is this %.” At that point, we arrange to see how we’re going to evaluate the full company value and determine how your percentage is going to be paid. The point of tension often arises from the exiting member’s concern about the timing, mechanics, and terms by which they will be paid. For example, will it be cash in a lump sum or a payout on a schedule? You’ll need to evaluate the value as well as the liabilities. Then you end up with a net equity and you apply the percentage you negotiated to allow the value to be determined. This can be either done by an appraisal or it can be done by an agreement of the parties where they say, “Okay we think the company is worth XYZ and we agree on that number and move forward with it.” From the exiting member’s point of view, the concerns are: “How I’m going to get my money “How am I going to get paid?” “What terms over time am I getting paid?” “I want my money now and I want my money as soon as I can.” “What security do I have if I don’t get paid — Do I get my company shares back or do I have some other remedy to get to my money?” From the member who is staying in the company, the concerns are: “How do I pay my exiting partner?” “Do I pay him out of my corporate funds?” “Do I go to the bank and borrow against that?” “Do I pay him on a monthly basis on a payout or can I afford to ‘lump sum it’?” “Can I afford to pay my exiting partner based on what I have left after they leave?” You have to have the negotiation of these issues. If there is agreement, then it’s very simple. You enter into an agreement incorporates how the split will go into an agreement: “I’m going to give you my shares; I’m going to give you my membership in exchange for an agreement.” From the exiting partner’s point of view, that agreement is their security, payment terms, and what they are permitted to do after leaving the company regarding new business pursuits. From the remaining member’s point of view, his thought process and his concern is not only making sure the payout is affordable, but making sure the exiting partner doesn’t turn around and compete against them by opening up “across the street” because of a change of heart about leaving the business. Protection for the remaining partner from this type of situation is established through certain covenants in the exit agreement limiting the exiting partner’s ability to compete, specifying forfeiture of customer lists and company trade secrets, etc… Such an agreement usually specifies that the exiting partner cannot compete for a reasonable period of time, nor within a reasonable distance in the same industry. If partners are in agreement on breaking up, the terms under which it will happen, including the exit agreement, then you’re set. The situation will go down differently if the split is involuntary. One partner wants the other to leave and the other one says I don’t want to leave. Or, one partner wants to leave themselves, and the other wants the partnership to stay in-tact. The key to this situation will again come back to your documents: “How do I achieve the withdrawal of a partner, either by forcing them out?” “Is there an option in the agreement that if one of us decides we want out, the other one can buy out the exiting partner under certain terms?” If you don’t agree on the split and you don’t have an agreement, things turn to a corporate struggle around who controls the company. “Do I, as the guy who wants my exiting partner gone, control 51% of either the voting stock, membership interest, partnership interest, or whatever it is? If so, do I have the ability to do certain things within those documents?” The caveat or concern here is that you, as the member who wants to force your partner out, must act with a duty of loyalty to him and a duty in the best interest of the company. If you fail to do that, then forcing your partner out unlawfully or against the terms of your agreement may result in your violating the partnership and being responsible for certain damages. Once you’ve determined you’re in control, you can make certain political moves, for lack of a better term. You can increase your own salary, you can increase the shares of stock that you own, you can decrease your partner’s salary, you can take away some of their goodies, their car, their life insurance provisions, and other things that are paid for by the company but will no longer be paid for by the company because you’re not going to provide that benefit to them. The concern at this point is now you’ve put them in a situation where they don’t really want to stay. That’s all based upon your control. If you don’t have that control or it’s a 50/50 proposition, then you are in a much more difficult situation. You can’t force the person to lower thier salary, you can’t control the company to increase your salary, you can’t add more shares, so you’re looking at possible litigation if your partner is not going to voluntarily do leave. This means you must go to court and get into a shareholder’s dispute over control. This is your least palatable option because it gets extremely expensive. It’s also not to anyone’s benefit, as it means paying lawyers instead of paying yourselves. In short, litigation is something to be avoided, if at all possible. If you are the minority member, however, and the majority member is imposing certain restrictions on you, you can go to court and sue for oppression, breach of fiduciary duty or duty of loyalty. The goal of such a suit would be to force the other person to give you a higher price. The bottom line regarding involuntary dissolution is, if one partner or one member has expressed an interest to no longer to be partners with the other partner, it’s kind of like a divorce. If one says, “I want out,” then you really shouldn’t be fighting over it. It’s better to reduce your expenses as much as possible and reach an amicable agreement that is in the best interest of all parties. Get the assets secured, the liabilities paid off, and go your separate ways. I hope that is of some help to you in resolving your differences. This educational blog was brought to you by experienced Business Attorney Walter J. Timby. Our law firm proudly represents clients throughout Delaware County, as well as Pennsylvania, Delaware and New Jersey. If you have any questions about how to go about splitting from a business partner, please contact our Delaware County Business Lawyers for a free case evaluation. Let our skills work for you.