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Business Divorce Breaking Up is Hard — Without an Agreement Like marriage, business relationships usually start off in a glow of euphoria and the future seems rich with possibilities. No matter how great your business relationship is, however, it's inevitable that at some point in time, you will need to manage a transition of ownership. The absence of an agreement can lead to costly litigation with an uncertain outcome. Providing for Alternative Dispute Resolution (“ADR”) in your agreement is a smart move. ADR runs from informal and non-binding “mediation” to binding “arbitration.” ADR is faster and less expensive than litigation, and your agreement can define the valuation methodology and buy-out process. In the absence of an agreement, ADR can still be a cost effective way to resolve such disputes. ADR is particularly appropriate for these disputes because the criteria established in court cases is hard to understand and implement. In Massachusetts, forced buy outs are banned. According to Brodie v. Jordan, 447 Mass 866, 857 N.E. 2d 1076 ( Mass., Dec 12, 2006) (NO. SJC 09822), the legal standard ranges from “fiduciary responsibility” to “reasonable expectations” of the business owners – a litigation quagmire that has continued for years without resolution. The possible reasons for a business 'divorce' are many:
Sometimes the relationship sours or the parties just need to move on and explore other interests. If the foundation for a buy out is put in place when everyone is calm and friendly, an orderly transition is much more probable. Paradoxically, the process of pulling together an agreement for how to part company actually helps to build a stronger working relationship, reducing the potential for conflict. The process helps to clarify roles and expectations about how money will be spent, decisions made, and priorities set. The agreement is really an opportunity to mutually and explicitly agree about how the business will operate. It's also an opportunity for minority shareholders to protect themselves and make sure that major decisions, such as sale of the business, issuance of additional stock and borrowing money, require more than majority approval. The agreement can specify that certain decisions require a 2/3 rds, 3/4 ths or unanimous approval. I've been a 'partner' (really 50% shareholder) in three separate businesses. Each business and relationship was different and yet worked well because roles and expectations were clearly stated. In each case, we successfully managed an ownership transition and I'm still friends today with my former 'partners.' I credit that first to having great 'partners', and second to having a clear agreement. A Buy/Sell Agreement is a contract to buy out the other owners under certain conditions (e.g., death, disability, divorce, retirement, disagreement) on certain terms. The benefits of a Buy/Sell Agreement include:
Since transferring ownership in your business is as inevitable as death and taxes, a Buy/Sell Agreement should be as basic as a will. More extensive succession and estate planning is beneficial, but covering the basics is essential. The absence of such a Buy/Sell Agreement can leave you with a nasty dispute, the resolution of which can be lengthy, costly and exhausting. A Buy/Sell Agreement can save you a lot of time and trouble in this lifetime as well as for your survivors at death. So, don't wait for a special moment of stress before you address the inevitable issue of business ownership transition. Jean D. Sifleet, Esq., CPA 120 South Meadow Road
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