Time for a 'Business Divorce'

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I handled the split up of a surgical center where all three owners, who were doctors, got along well when the money was really loose. But post-Lehman, when things began to get really tight, they realized they not only didn't like each other but they also didn't trust each other. Negotiating the separation agreement was hilarious. We had to get into a level of granularity that included whose name plates would remain on what doors until what dates.

What about post-business divorce? Are there issues about future business opportunities?

Definitely. Typical LLC agreements include standard language that says [a withdrawing partner] is not prohibited from being in another business, but if he gets opportunities that apply to the original business, they have to go through that business. So a partner that is leaving may want to go into the same business elsewhere. Or he may have done something before the split that the former partner claims is a business opportunity the original company should have gotten.

Are there surprises that come up when a partnership is ending?

Often there's an elephant in the room that no one will talk about until an attorney like me says, "Something has to be done about this elephant."

Sometimes one or more partners doesn't have any notion about the taxes or hasn't looked deeply into the finances. When they do, they realize that certain things had been going on that were very unseemly. One of my clients found out that the principal shareholder in her firm had taken a $15 million distribution that she was completely unaware of because she'd never looked at the corporate tax returns.

Are business divorces likely to wind up in court?

There's always the potential for litigation. I've actually tried a few of these cases and found that judges generally don't like them, especially where the parties have a lot of money. They see it as a bunch of rich people squabbling over their fortunes. Judges tend to bring down the hammer fairly quickly and appoint a receiver or referee to work out a settlement.

What happens to companies that don't have formal partnership agreements or LLC operating agreements?

In a business dissolution case they default to their applicable state corporations code. Those codes all have provisions that deal with creditors and other stakeholders and what priorities they get for repayment.

What advice would you give business owners before they get into divorce situations?

Have some kind of written agreement, either an LLC operating agreement or a buy-sell agreement or a shareholders' agreement. Absent an agreement, it very much behooves a business owner to consult with savvy counsel to identify all the issues of a business divorce, including those that may not be immediately apparent to the business owner.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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