Business divorces – Why they happen and how to resolve them

One thing that is nearly as bad as getting divorced from your spouse, is to endure a toxic business separation. Like all divorces, some go well, others go okay and some go terribly. There are some key reasons that cause business separations which come up time and again.

These include:

1. Uneven contributions – this is where one party perceives that they are contributing more (for example, doing more hours or work, more business development or management, putting in more funds etc) than another party. The parties will usually have opposing views, of course.
2. Inability to make decisions – the parties not agreeing on how to run the business, ranging from operational issues through to the strategic direction of the business.
3. Poor communication – not enough talking or not enough listening. With hindsight, the parties can often see the signs of where things started to come off the rails, and usually communication has played a part.
4. Lack of alignment – this tends to permeate into all other issues. This could relate to financial alignment (for example, the financial reward for the contributions made by the parties being perceived as unbalanced), differences in management style or even the parties being in different stages of their lives/careers. In this regard, it’s not uncommon to see an age gap between disputing business owners.
5. Financial stress.

By the time lawyers get involved, usually things have already come to a head and the parties have tried but failed to negotiate their business separation. Often the business’ accountant has been stuck in the middle and has reluctantly encouraged the parties to get lawyers involved.

From this point, the business separation usually becomes inevitable, and if not resolved quickly the business begins to suffer with the staff and customers caught in the middle.

Like any divorce, the parties often find it difficult to look at things objectively. It is important to be represented by a lawyer at this stage not only to advise you on what you should be doing but also perhaps what to avoid. For example, parties often devote a lot of energy regarding who was at fault for the separation, and this is usually not conducive to actually implementing the (now inevitable) separation.

It is at this stage that the value of having a Shareholders Agreement becomes apparent. A well drafted agreement will permit the parties to initiate a pre-agreed and binding process to resolve the dispute – usually involving the initiating party having a right to buy out the other party, including an independent valuation if required.

Depending on the circumstances, there may be more than one process that can be applied, and it is important to get advice on the best way to proceed and when to do so. The agreement will usually also provide for certain rules to apply in the post-separation period, including non-compete obligations, repayment of loans, removal of personal guarantees and similar issues.

In the end the parties will sometimes agree to deviate from the exact procedures in the agreement (for example, exceptions to non-compete obligations that might have been too onerous so that the exiting party can still be gainfully employed) but generally negotiations will not have gotten to that point without having the agreement in the first place.

Aside from one party buying out the other, other methods of achieving a business separation include winding up the business and the parties going their separate ways (sometimes, requiring a Court Order), or a sale of the business to a third party (usually, only practicable where the parties are still amicable).

If there is no Shareholders Agreement (or worse sometimes, a poorly drafted agreement) the parties will need to be more strategic in negotiating a separation, and it will take longer to get to that point.

In this regard, lawyers will have regard to the different hats the parties may wear in the business (employee, director, shareholder, lender etc) and seek to leverage those positions to encourage a particular outcome.

Consider for example, if one party has loaned money to the business – is there a right to call in repayment and is there security that can be enforced over the assets of the business?

Other issues will come into play as negotiations ensue, including the personalities of the parties (and their lawyers and other advisors), the parties’ strength of relationships with staff and customers, and of course, who might have deeper pockets. This process will be more complicated and unpredictable compared to where there is a well drafted Shareholders Agreement.

These matters do get sorted out in the end, but they don’t on their own and getting advice early is usually the best solution and ensures the best results.

If you would like more information or advice, please contact the team at Macpherson Kelly.

^{_{Published 09 April 2021
This article was written and supplied by Robert Shepley from Macpherson Kelly}}