Just like with personal relationships, breakups in business partnerships can happen for a variety of reasons. Maintaining a business takes a good amount of dedication and hard work; breaking it up can be incredibly expensive. Not only that, but a business divorce can destroy a company and the assets it has built for years. Despite these events being necessary for certain situations, efforts should be made to avoid these costly breakups well ahead of time.
Business relationships, just like any other kind of relationship, can be complicated and sometimes come to an end. There are many signs your partnership may be headed for a business divorce, including one partner not carrying their weight or living up to their obligations under the terms of the partnership agreement. If you want to keep your company up and running, read more below about how to avoid a business divorce.
Avoiding a Business Divorce
Owning and operating a business can be incredibly challenging on its own. And, if partnerships have run their course, it can quickly become even more difficult to manage operations, often leading to a business needing to be dissolved. No matter if a business has been in operation for six months or several decades, if it is not adequately prepared to go through a business divorce, the process can prove to be costly, emotional, and sometimes litigious.
A business divorce or business dissolution refers to the formal closure of a business within the state it resides in. This is important to note, as businesses cannot simply decide to close for good, put up closed-for-business signage, lock their doors, and consider themselves dissolved. Business divorces must be formally processed with the state to be legally binding. However, business partners should take important steps from the outset of operations to avoid a business divorce entirely.
Some of the most important steps owners can take to avoid a business divorce include:
Starting With a Solid Foundation
Businesses often involve important relationships with partners, other individuals, companies, and vendors to operate. Each business relationship needs to be clearly and specifically defined in a well-written and thorough contract before work commences. Contracts between business partners need to clearly define each partner’s duties, roles, investments in the business, compensation, and expectations, among other important operational and management items. When foundational elements of a business partnership like these are not clearly defined, partners can easily find themselves involved in complex legal disputes that can lead to a business divorce.
This is also true for contracts involving the relationships between the partnership and internal and external individuals and companies. Business relationships with employees, vendors, contractors, and others function best when outlined and detailed clearly. This helps to ensure partners are on the same page about which relationships are necessary for the business to thrive and the structure surrounding each relationship.
Business agreements often contain important provisions which can be the cause of many issues when a business divorce is contemplated. Business contracts and the relationships involved must be addressed at the beginning of operations to provide clear and precise guidance and to help hopefully avoid a business dispute. Some business agreement provisions that can prevent future conflict include:
- Spousal Interference
- Competition Involving Former Partners
- Buy-Out Circumstances
- Governance Provisions
- Estate Planning
- Valuation and Payout Procedures
- Legal Remedies
Once the business has been in operation for some time, it is important that owners take the time to regularly review the company’s finances to ensure a business divorce isn’t necessary. When doing this, owners must start by asking important questions such as:
- Does the business have sufficient cash flow to meet all of its financial obligations?
- Are all debts being paid on time, including those that have been assumed on behalf of the business?
- Does the business have enough cash on hand to cover emergencies?
If any of these questions have been answered with no, then the business partners must consider trimming costs to potentially avoid a business divorce.
Cutting Down on Expenses
If owners need to cut down on expenses after thoroughly reviewing their finances, they must act accordingly by reviewing some of their options for cutting costs. For instance, some nonessential functions like administrative work or running payroll can be outsourced. Cutting back on discretionary spending is also an important aspect to consider, as expenses like covering parking validation for customers can easily be eliminated. Taking the time to review equipment leases can also help cut reduce business expenses. This is especially important, as the business may be leasing equipment it no longer needs, under contract terms that can be renegotiated, or that can be found more cheaply with a different vendor.
Considering Smaller Concerns
While business partners can tend to focus on more big picture items, owners should also take into account the smaller concerns the business is likely to encounter throughout its time in operation. Despite not being of immediate importance in most cases, these small issues can quickly become big and/or combine to create a larger issue with the potential to lead to major problem areas between partners. For instance, the property may have a large tree obstructing the public from viewing the business, or the company may have ineffective advertising strategies, inadequate parking, or lack of traffic access for potential customers or clients. Although seemingly minor issues, these small problems can put a major dent in a business’s bottom line if not addressed.
Discussing Potential Partner Disputes with a Business Divorce Attorney
Taking the time to review potential issues between partners that could result in a business divorce with an attorney is important. Simply talking with an experienced business law attorney does not mean a lawsuit is being filed or that your partnership is being dissolved. Attorneys often act as counselors to business partners to help them find common ground and understand the contractual obligations already in place so they can best advise them on how to move forward. Experienced business attorneys can help to ensure a company’s best interests are put first and provide legal strategies that can help further preserve corporate operations and avoid a business divorce.
Houston Business Partnership Attorneys
A business divorce can be devastating for owners to go through. After putting years of hard work and money into an operation, business partners can feel lost if they must separate and their hard work is dissolved. At Feldman & Feldman, our Houston partnership dispute attorneys have helped a myriad of business partners in need resolve disputes that could have ended their businesses altogether. If your business needs assistance, we can help.