Bad Business Breakup Around the Corner?

Business partnerships are never easy and can fail in both times of prosperity and times of strife.

There are many reasons for breakup: bad financial results, good financial results, personality differences, lack of trust, conflicting visions, etc.

Often, the knowledge of an impending breakup precedes the actual breakup by months, if not years. In the meantime, if lack of trust develops, the emotional content of exchanges between the business partners can become very negative, and going to work can become unbearable. If the financial results are good, it is likely that tense energy in a partnership would surely erode the good results eventually anyway.

In order to mitigate the uncertainties that can surround or lead to a potential future breakup, business partners should always have a partnership or shareholders agreement in place prior to starting a business. This agreement can cover decisions ranging from trivialities like tissue paper to more core issues, such as first right of refusal on a business sale. With this agreement, all of the shareholders, especially minority shareholders, would know their rights during the tense periods of a business partnership.

Another consideration is each shareholder seeking their own professional representation in the case of a dispute if each party has not done so prior to starting the business. Often to diffuse the frustrations inherent to a business break up, an accountant or a lawyer can provide an objective, rational view of the situation. It is not uncommon for the client to start the meeting feeling that their evil partner has acted in an underhanded way. Often, the accountant is able to crunch the numbers, often proving otherwise, leaving the client calmer and more rational in their approach to the situation.

Another way the accountant can help is to provide the know-how needed to end the partnership itself in a tax efficient manner. There are a few options – the business can be outright sold to a third party or one shareholder can buy out the other shareholder(s).  Again, how the partnership is terminated and the preferred tax structure behind the transaction has the potential to benefit one partner more than the other. So, independent representation again would inform each shareholder according to his/her own best interests.

It is human nature to want to get out of a bad situation fast regardless of the cost.  Independent professional advice would prevent rash decisions such as selling the business at a discount and it would also reduce the negative emotional content of the shareholders’ interactions, avoiding unnecessary future regrets by all parties involved.

If you are looking for independent business consulting or have questions about succession planing please don’t hesitate to contact us to learn more about how we can help you!

Disclaimer: All Rights Reserved for Mew & Company. This blog post is designed to provide information for personal use only. Please consult your professional tax advisor for further information. Mew & Company is not responsible for any legal disputes resulting from the content of this blog post.