What Is a Business Divorce?

Like any other relationship, business partnerships can also come to an end. A business divorce is the official separation of business partners who can no longer work together for various reasons. 

Business divorces can occur in any kind of business — a corporation, partnership, or limited liability company. They can affect not only the partners but also other stakeholders, such as customers, suppliers, investors, and minority shareholders. 

This guide provides an overview of business divorces, how they occur, and how the involved parties can better understand their rights and protect their interests.

What Is a Business Divorce?

A business divorce occurs when partners, co-owners, or shareholders of a privately owned entity legally end their business relationship. This separation can be either cordial and voluntary or contentious and litigated.

Regardless of the circumstances during the split, the separation process involves intricate legal, operational, and financial aspects of a business, including the division of assets and liabilities. 

Many factors can result in a business divorce, including:

• Personal reasons affecting one of the partners, such as an illness, marital divorce, retirement, bankruptcy, or death
• Irreconcilable disagreements on key business operations, such as finances and expansion strategies
• The theft of sensitive company information by one or more partners
• Neglect of duty by one or more partners
• Involvement of one or more partners in fraudulent or unlawful activities, litigation of which could put the business at risk

Whatever the cause, a business divorce is likely to lead to one of four outcomes — partners selling ownership stake, buying out other partners, choosing to sell the business altogether, or dissolving and closing the company. 

The Process of a Business Divorce

A typical business divorce begins with evaluating the dispute and whether the disagreements are fully irreconcilable. In some cases, partners may find a solution to the conflict early enough and avoid going through the complex separation process. However, other disputes, such as a partner’s involvement in fraudulent behavior, can be hard to resolve, and the only way out is ending the business relationship.

The entire business divorce process can be broken down into four key steps.

Step 1: Reviewing the Operating Agreement or Bylaws

An operating agreement is an official document that outlines the management structure and operational procedures of a business. It also provides a roadmap for resolving disputes, such as business divorce and dissolution. Reviewing the operating agreement at this point can help protect everyone involved, including the business entity, remaining partners, and the exiting partner. 

Without this agreement, a business must resort to default state laws, which may not cover circumstances specific to a company or industry. Operating agreement provisions that are essential during a business divorce include buy-out triggers, company governance, asset division, and terms of dissolution. 

Step 2: Engaging a Business Dispute Attorney

Consulting a business dispute attorney with experience in business divorce and positive client reviews early on is important.

An attorney can help business partners not only understand their rights in the separation process and avoid making costly mistakes but also interpret legal documents, including the operating agreement. They can also help negotiate favorable terms and represent the partners in court in case of commercial litigation. 

Step 3: Conducting Business Valuation

Business valuation is the process of measuring the health and wealth of a company for asset division and business dissolution. It is used to determine a fair value of tangible assets, such as equipment and buildings, as well as intangible assets like intellectual property and customer goodwill. With accurate and updated valuation, business partners can ensure an equitable settlement after dissolution or a buyout. 

Independent valuation experts are best suited to conduct the appraisal because they can ensure fairness when recording assets. Their lack of bias when reporting may also reduce the chances of heightened conflict during the business divorce.

Step 4: Negotiating a Buyout or Dissolving the Business

In most business divorce cases, one or more partners remain in operation, so they must buy out the exiting partner. Partners should leverage their attorneys in these negotiations to get what they deserve on dissolution. Negotiating a buyout involves agreeing on a price, the payment terms, and the exiting partner’s future involvement in the business. 

When dissolution is the only solution, partners must then notify creditors, pay off debts, wrap up outstanding contracts, divide business assets, and file for dissolution with the state government.

Factors to Consider During a Business Divorce

A business divorce can be less contentious when partners consider the factors below and take appropriate action.

Tax Implications

Common tax issues that may arise during a business divorce include transfer taxes, income tax, and capital gains tax. Partners should consider hiring a tax advisor and other experts to minimize their tax liabilities through solutions like tax-free business reorganization and tax deferrals. 

Consequences of Litigation

Litigation can cost a business a lot of money as well as impact its reputation with customers. Partners should consider all these effects and create a business divorce plan that protects the entity and all parties involved. 

Regulatory Compliance

States have laws on how businesses should dissolve according to their industries. Business partners must reacquaint themselves with these rules to ensure compliance. 

Alternate Dispute Resolution Methods

Before going to court for litigation on a business dispute, partners should try alternative dispute resolution methods, such as mediation and arbitration, to save time and reduce costs.

Learn More From the Global Legal Law Firm

A business divorce can be painful and messy, but it doesn’t have to be. Professional legal guidance can help you reduce the pain of separation through honest communication and setting clear expectations.

Business dispute attorneys at Global Legal Law Firm, with offices in California and Florida, have been helping business owners and shareholders navigate such conflicts locally and nationally since 2008. We have represented business clients, and our attorneys are ready to listen to your case as well. Contact us at (858) 463-6944 or through our online contact form today.