Lawyer’s Corner: You want to separate from your business partner(s). Where do you begin?

You were exited to start your business with a business associate(s) or a friend(s). The last thing you thought about was a separation. You probably considered a long-lasting future not noting that circumstances, people, relationships, and businesses change or that you may realize there is an unequal share of responsibilities, you have different work ethics, or you disagree even on key goals. So now you suddenly find yourself wanting to leave.  Below are some points to consider:

1. Seek Advice: Attorneys and financial experts can provide advice on what to expect, how to approach, what to ask for, and when to finalize a separation. Engage an attorney who will work only with you. This allows the parties to negotiate professionally with less emotions. Discuss with her the entire process before speaking with your partner(s), much like an insurance policy that protects your rights, assets, and investments. Not only does this provide for a better outcome for you, but it can also help preserve any friendships or relationships that you may have.
2. Consider All Solutions: You may only be thinking of keeping the business or dissolving it while there may be other options. Discuss your circumstances with experts who are not connected with the business. Some businesses may be saved. For instance, instead of dissolving your entity, you may reduce a partner’s responsibilities to improve their performance or buy your partner’s share of the business or sell your own, which may even facilitate your departure.
3. Review Entity Documents: Ideally before you started your business you consulted with counsel and planned ahead. If you created an agreement between you and your business associates before starting, with your attorney review the agreement or other business documents that set the structure of the entity and how disagreements or separation is managed. While these agreements don’t address every conceivable situation, they can be a starting point and a reference for your separation and the negotiations. They may even save the friendship you may have.
4. Communicate When Calm: As business decisions often impact finances, separate feelings from business decisions. You may feel a range of emotions but avoid communicating with business associates at such time. Don’t engage with your partners when emotional. Collect yourself before calling or sending an email. Keep in mind that if a business relationship doesn’t end amicably, it can lead to costly legal bills and consume your time and energy to resolve through litigation.
5. Identify Priorities and Desirable Outcome for Everyone: Determine what’s most important to you. Explore the consequences of various solutions, evaluate tax liabilities, your financial situation, and your professional goals before deciding how to end your relationship. And to minimize conflict, pursue an outcome that benefits everyone. As in any negotiation, all sides need some wins.  A business relationship can be ended in a way that is beneficial and satisfactory for all parties.  Define a set of desired results and make decisions from a place of fairness.  Note the consequences that ending the partnership will have on the other parties to facilitate your transition.
6. If Not Dissolving, Set a Price: Usually the entity documents address evaluation issues and sale of the business. If not, determine a realistic price range using an or a combination of applicable method(s). For instance in an arms-length transaction you can: (a) price the business assets and add an amount for the goodwill, (b) use an industry formula such as a value based on the number of annually sold items or a multiple of average earnings; or (c) determine the recent purchase price of comparable businesses in your industry and area.
7. Consider Tax Consequences and File Applicable Documentation: Consult with a tax expert as taxes can be costly. Your tax liability may be influenced by how you set up your entity and whether you’re selling or buying the entity or the assets.  A tax expert can advise on the best strategies. Also, after the sale, be certain that you and the buyer file any applicable tax documents.
8. Execute an Agreement: Negotiate your separation and document your agreement.  For instance, if you’re buying or selling the business your agreement may list and value the assets, any obligations assumed, include protections assuring you’ll get paid, along with other applicable provisions.  Once the agreement is signed, follow through and make sure you meet every obligation and requirement on time to avoid any further conflicts.

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