Negotiating the Exit in a Business Divorce

Business Insights

Negotiating the Exit in a Business Divorce

Jul 2, 2024 | Business Insights

Negotiating an exit in a business divorce can be one of the most critical phases of the entire process. Somewhat like a conventional divorce, business divorces involve complex financial, operational, and personal considerations that can significantly impact the future of all parties involved. This blog, the third in our eight-part series, focuses on the “Dos” and “Don’ts” in taking the steps and initiating strategies for exiting the business. With the right approach, it’s possible to reach an amicable resolution that preserves relationships and secures a fair outcome for everyone.

The “Do’s”:

Open and Honest Communication

Do not get caught in the trap of not communicating with a co-owner or business partner of the intended plan to end the relationship. If you have already reached the point of ending the relationship, then it is likely that the lines of communication are already blocked, so start opening those lines of communication to navigate an exit. Be clear and honest about your reasons for considering an exit, which will help build trust and reduce misunderstandings. If communications start out openly, then there might even be a road for a resolution to the initial reasons for business divorce.

Focus on the business issues that brought the issue of separation to a head. Keep the discussion professional. Likely, a co-owner or business partner is a lifelong friend, and you are only seeking to end the business relationship, not the friendship. Use neutral, non-confrontational language. Statements like “I feel we have different visions for the business” are less inflammatory than “You are wrong about everything.” Highlight the shared objectives, such as ensuring the business’s continuity or achieving a fair financial settlement. Set clear ground rules for negotiations, such as respecting each other’s opinions and not interrupting when someone is speaking.

Be Flexible

Mediation and Alternative Dispute Resolution (ADR) are invaluable tools in the business divorce process. These methods provide a way to resolve disputes without the need for costly and time-consuming litigation. Benefits of mediation and ADR include:

  • Cost-Effectiveness: Mediation and ADR are generally less expensive than going to court.
  • Time Efficiency: These methods can significantly reduce the time needed to reach a resolution compared to traditional litigation.
  • Preserving Relationships: Mediation encourages cooperation and can help maintain professional relationships, which can be crucial if parties continue to interact post-divorce.

Processes and Benefits of Mediation

Mediation involves a neutral third-party mediator who facilitates discussions and helps parties reach a mutually acceptable solution. Here’s how the process works:

  1. Selection of a Mediator: Choose a mediator with experience in business disputes and a good understanding of your industry.
  2. Preparation: Gather all relevant documents and information beforehand. Clearly outline your objectives and desired outcomes.
  3. Mediation Sessions: During sessions, the mediator guides discussions, helps clarify issues, and encourages cooperation. Both parties have the opportunity to present their views and negotiate terms.

Success stories and case studies often demonstrate the effectiveness of mediation. For instance, a tech company might resolve a business divorce amicably through mediation, allowing both founders to retain a stake in the company while pursuing their individual business goals.

Compromise

Hire an Attorney

What may seem like a shameless plug is actually a sound piece of advice: hire an attorney to help you negotiate the exit. When it comes time to formalize the agreement, an attorney is key to avoid any litigation stemming from the exit. Hiring a transactional attorney at the onset will save you money in spades if you end up in litigation with your business partner or co-owner over any exit.

The “Don’ts”:

Compete

Do not set up a competing business without formalizing the business divorce. There are serious legal implications if a competing business is formed and siphoning away business from the current company while a separation is being contemplated.

Poach

Do not start informing your employees that you are going to set up a competing business and that they should come to any new company. There are serious legal implications in driving away employees from the current business.

Disparage

Do not disparage or “badmouth” any co-owner or business partner while you seek to negotiate a divorce. Avoid any bad blood to allow for a clean separation.

Leave without Negotiating

Although you may be at the end of your rope with your business partners and co-owners, do not leave the business without negotiating an exit. You still owe duties to your co-owners and business partners that are implicated before the split of the business is determined.

Conclusion

In this blog, we explored the “Dos” and “Don’ts” for negotiating an exit in a business divorce. From initiating discussions and setting the tone for negotiations to leveraging mediation and drafting comprehensive separation agreements, each step is vital for a successful resolution.

Stay tuned for the next installments in our series, where we will delve into the legal considerations and processes involved in a business divorce. Each blog will provide deeper insights and practical advice to help you navigate this complex terrain.

If you have questions or concerns about a business divorce, please contact Allison Riddle at (703) 284-7260 or ariddle@beankinney.com. Our firm practices in Virginia and the District of Columbia in addition to various other jurisdictions.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.

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