Home | Breaking Up Is Hard To Do: Splitting Up A Business
Breaking Up Is Hard To Do: Splitting Up A Business
BREAKING UP IS HARD TO DO: SPLITTING UP A BUSINESS
Many businesses thrive on the existence of different personalities who together have the synergy to build a successful business. One partner may excel at sales and public relations. Another partner may excel at the logistics of providing high-quality products or services. Perhaps a third partner is good at keeping the infrastructure of the business—its finances, its budget, its hiring—on task.
As the years go by, though, the abilities and the needs of the partners may change. Many business breakups are due to differing expectations and personalities. One of the most difficult confrontations for a business partner is the termination of a business relationship, whether the business is structured as a corporation, a limited liability company, or a partnership. An even more difficult confrontation, however, is when a partner or key employee bolts to set up shop elsewhere.
Partners who want to initiate a business breakup bring one set of tools to the table. Those who are ambushed with a breakup need an entirely different set of tools.
The Planned Breakup.
People and businesses change over time. Planning a business should involve a strategy for winding down the business should that time come. Unfortunately, many people don’t make such plans. The first thing that you should do is to examine the governing documents of the business. Somewhere in the bylaws, the operating agreement, or the partnership governing documents there should be reference to the procedures to be followed in the event of a dissolution of the business.
Obtain early advice from your lawyer and accountant about your plans. Doing so can prevent a lot of headaches.
Establish a transition plan. Identify the positive traits of each partner and employee in the organization. Determine who will assume the responsibilities of the departing partners.
Before communicating your desire for a breakup, you need to determine your business priorities. Do you want to stay in the same line of work? Do you want to buy out your partners? How does the business divide up its assets to maximize return to owners? What about personnel? Who gets to hire key personnel, and when should personnel be given notice? Should payment be made or received in exchange for a non-compete agreement?
Do not let your emotions make decisions for you. It is extremely important that the breakup be handled professionally, with minimal pain to the owners and employees. Too many breakups end up with many tens of thousands of dollars in litigation and months or years of unnecessary stress.
In any event, the initiation of a breakup generally begins with a series of in-person meetings. Focus on the positive. Compliment your partners on their willingness to join in the venture. Refer to some of the successes and failures. Then explain why the venture is no longer a good fit for you. It could be the lack of revenue from the COVID-19 pandemic. It could be due to the partners not sharing proportionally the responsibilities of running a business. It may be due to different working styles or personalities. It could be different expectations for expenditures or goals.
Do not turn the dissolution into a divorce proceeding. You might be hurt, frustrated or angry with your partners, but avoid saying and doing negative things that will add fuel to the fire and make the process more difficult.
In some cases, the involvement of lawyer or consultant who does not represent any partner but who instead acts as a mediator can be helpful in resolving sticky issues.
Be alert for any aggressive actions by your partners as it relates to customer lists, vendor list, computer data, outside financial accounts, equipment, use of credit cards, and the like. Monitor revenue and cash flow during the transition.
Try to set a reasonable timeline for the breakup.
The Ambush Breakup.
Other busines breakups are not planned. You may learn about them when your partner or key employee “jumps ship,” leaving a wake of usurped opportunities or stolen clients behind.
The damage of an ambush breakup can be minimized by careful upfront planning. A business can draft employment and non-disclosure agreements to protect trade secrets, confidential information, and the use of company property to help a competitor or to launch a new enterprise.
At the first inkling of an ambush, ask your lawyer to help you determine your rights under your business’s governing documents and employment agreements.
Make sure to terminate the key accounts and important access points of the person who is departing, such as:
Accounts at financial institutions.
Credit cards.
Computers and email access.
Accounts for software vendors.
Physical access to the premises.
Immediately contact your most important customers to try to preserve the relationship. Sometimes, the departing employee or partner will have tried to “poison the well” on your relationships with these customers. Some employment agreements may prohibit a departing employee from competing for a period of time or from soliciting customers of your business. Even if your contracts do not contain such a prohibition, an employee generally cannot actually start to compete with you while being paid by you or use your resources to compete with you.
It is common for departing employees to try to lure other employees away. Meet with key employees who are staying behind to find out their plans and intentions. If they are simply lying in wait for your competitor to get a running start, you may need to take action now against the employee.
Send a letter to the departed employee or partner identifying any property that is confidential and that must be returned or not used in the competing venture.
Do not defame the departed employee or partner. It is easy to want to let loose with a tirade of accusations, but this can create unnecessary legal problems for you.
Preserve all text messages, emails, and documents by the departing partner or employee.
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Swanson Hatch, P.A. is a Minneapolis law firm that represents businesses and individuals in business breakups and unfair competition disputes. The firm was founded by two former Minnesota Attorneys General: Mike Hatch and Lori Swanson, who consecutively served as Attorney General of the State of Minnesota for 20 years, from 1999 to 2019. Lori Swanson served as Attorney General from 2007 to 2019. Prior to that, she served as Solicitor General of the State of Minnesota and Deputy Attorney General. She was previously Chair of the Federal Reserve Board’s Consumer Advisory Council in Washington, D.C. Mike Hatch served as Attorney General from 1999 to 2007. Prior to that, he served as Commissioner of the Minnesota Department of Commerce for seven years. The firm can be reached at 612-315-3037. Visit their website at www.swansonhatch.com.
www.swansonhatch.com
431 South Seventh Street, Suite 2545
Minneapolis, MN 55415 612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
SPLITTING UP A BUSINESS
Many businesses thrive on the existence of different personalities who together have the synergy to build a successful business. One partner may excel at sales and public relations. Another partner may excel at the logistics of providing high-quality products or services. Perhaps a third partner is good at keeping the infrastructure of the business—its finances, its budget, its hiring—on task.
As the years go by, though, the abilities and the needs of the partners may change. Many business breakups are due to differing expectations and personalities. One of the most difficult confrontations for a business partner is the termination of a business relationship, whether the business is structured as a corporation, a limited liability company, or a partnership. An even more difficult confrontation, however, is when a partner or key employee bolts to set up shop elsewhere.
Partners who want to initiate a business breakup bring one set of tools to the table. Those who are ambushed with a breakup need an entirely different set of tools.
The Planned Breakup.
The Ambush Breakup.
Other busines breakups are not planned. You may learn about them when your partner or key employee “jumps ship,” leaving a wake of usurped opportunities or stolen clients behind.
Swanson Hatch, P.A. is a Minneapolis law firm that represents businesses and individuals in business breakups and unfair competition disputes. The firm was founded by two former Minnesota Attorneys General: Mike Hatch and Lori Swanson, who consecutively served as Attorney General of the State of Minnesota for 20 years, from 1999 to 2019. Lori Swanson served as Attorney General from 2007 to 2019. Prior to that, she served as Solicitor General of the State of Minnesota and Deputy Attorney General. She was previously Chair of the Federal Reserve Board’s Consumer Advisory Council in Washington, D.C. Mike Hatch served as Attorney General from 1999 to 2007. Prior to that, he served as Commissioner of the Minnesota Department of Commerce for seven years. The firm can be reached at 612-315-3037. Visit their website at www.swansonhatch.com.
www.swansonhatch.com
431 South Seventh Street, Suite 2545
Minneapolis, MN 55415
612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
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Swanson | Hatch, P.A.
431 S. 7th Street, Suite #2545
Minneapolis, MN 55415
612-315-3037
www.swansonhatch.com