December 2017 |  Fiona McLay

When you start a business together, full of the bright promise of a shiny profitable future, it seems wrong to plan for the end of the business.  But the reality is that, no matter how great your idea is and how well you get on now, things can and do change.

When business owners can no longer work together, unless one can afford to buy the others out, the business has to close down.  Inevitably any assets are sold for less than the business would fetch as a going concern.

There are some things that can be done to prevent a falling out between individuals bringing down the whole business.

Get off to a good start

Tip #1 You need a written agreement.

Too often people (often friends or family members) go into business relying upon a vague conversation, or even worse, unstated expectations, as to how they will each contribute.  Having a detailed conversation at the beginning is a smart move.  If you aren’t able to talk about how you are going to fund the business, what contributions will be required and how a co-owner will exit then you aren’t ready to run a business together.

If you are all shareholders of a company, the company’s constitution is a contract between you but most constitutions do not adequately deal with dispute resolution.  So if there is a dispute, it will probably be necessary to have the Court appoint an external administrator.

Talking to a lawyer facilitates discussion of important questions you might not have asked of each other so that each of you have a clearer understanding of what is expected going forward and a framework to review as the business grows.  Hopefully, like an insurance policy, once signed the agreement can sit in the bottom drawer while you get on with running a successful business.  If you are already running a business without a written agreement in place have the conversation now.

Tip #2  You need a lawyer.

No matter how well you get on and how amicable your plans, if you are investing significant money in the business you need a proper agreement prepared by a commercial lawyer who understands the business plan.

It is certainly possible to get a template agreement off the internet and call it a shareholder’s agreement.  But if you don’t know what you are doing you can wind up making things more confused, messy and expensive than they need to be.

I recently saw a client who had a DIY agreement that was internally inconsistent and different to the notes of the handshake agreement that the parties had intended.  The signed DIY agreement confused key legal concepts which gave rise to a whole new dispute.

Tip #3 make a written record of important events as they happen.

It is good practice to record key decisions affecting the business in writing to minimise the risk of genuine misunderstandings or miscommunication.

If a dispute escalates a written record is invaluable in trying to recall the detail of key conversations and events. Write things down as soon as you can when they happen. If you have a bad feeling about where your business relationship is headed you may want to save important documents or emails somewhere secure. An easy way to make a quick note is use your phone to record a voice note or a video for your own future reference.

Tip #4 keep a critical eye on the business.

It is easy to get caught up in working in the business and let a business partner (who is better with numbers or details) deal with the books.  You need to know enough about the business fundamentals to be able to spot warning signs.  Make sure you get (and look at) the boring details about where the money is coming from and going to.  You don’t need to be paranoid but you can’t abdicate financial responsibility.  Spending some time learning how to read and understand the numbers will pay off in the long run.

Once you fall out with your business partners or co-owners.

Tip #5  Step away from the anger.

Sometimes people you believed in disappoint you.  You may be tempted to deny or to downplay the emotional side of the end of a business relationship.  When a business partner that you trusted has done the wrong thing and let you down it is important to acknowledge the hurt and anger.

Once you acknowledge your feelings it is easier to whether it is realistic to expect you will be able to sit down with your business partner and negotiate a peaceful separation of your business interests.

Once the trust between you is gone, you will need some help, preferably from a third party, to sort things out.

Talking to a lawyer can bring some objectivity into the picture and help you work out what is an achievable resolution.  For instance, if your business partner has taken more than their fair share, the desire for revenge might cloud your perspective.  Would you be financially better off in the long run to get a clean break?

Tip #6 Be realistic about value.

Sometimes your assessment of the business you love and believe in is unreliable.  If you are a professional service provider who worked hard to build a busy practice full of happy loyal clients generating you a comfortable income it can be a shock to find that does not translate into the market value you expect.

It is quite common for a founder of the business to overvalue their contribution, seeking recognition of years of hard work and emotional commitment.    Start ups can also struggle to establish objective value, despite projected returns and passionate belief in the product.  It can help to get independent advice about what is a fair value.   You may need to assess whether a prolonged fight about valuation is the best path for the business, and for you.

Tip #7 Don’t be guilted into paying more than your fair share.

If you are the one who wants out of the business, don’t agree to give your business partner everything just to escape.  Talk to a lawyer and get their advice about what is a fair division.

Tip #8  You don’t just need a lawyer.

You will also need to talk to your accountant or financial adviser and check the financial implications of splitting up the business.  Depending on how you have structured the business, there could be significant impact on your ability to borrow money going forward.  For instance, if you have guaranteed financing for leased corporate vehicles or equipment, arrangements need to be made to finalise those obligations without affecting your personal credit record.

Tip #9 Splitting the business is hard.

Realistically you cannot split a business down the middle.  If you can’t work together anymore, there is going to be some disruption and expense to readjust and re-establish new businesses.  It is easy to descend into prolonged disputes over the right to business assets, the location, business name, key employees and key clients.

You need to get some clear objective advice that can help you see the wood for the trees.

Tip #10 Keep an eye out for warning signs.

Don’t let lack of communication with your business partners distract you from the financial position of the company.  Are suppliers complaining about late payment or refusing credit terms?  Are the BAS submitted on time?  Have you received a creditors statutory demand?  Even if the other directors won’t face reality about the financial position you can seek advice to avoid exposing yourself to penalties for insolvent trading or liability for unpaid tax.

Tip #11 Resolving a dispute is a process.

The process of resolving disputes is worthy of an entire article but in short, it can’t be rushed.  Uncovering the facts, appreciation of the risk and downsides of prolonging the dispute, the impact of continued expense and disruption all contribute to shifting the parties to a resolution that they can each live with.  I don’t advocate putting your head in the sand and hoping the bad atmosphere will blow over.  You need a lawyer who understands and can explain your options.  Then let them present your position in a coherent and persuasive way and wait.

Sometimes achieving the best outcome requires calculated patience.

Tip #12  Understand that Court cases take time.  

If you do need to get  a Court order to dissolve the business, it will take longer than you think.  Don’t act hastily without getting some advice about what is involved and the likely time frame.  You need to understand the process before you decide how to approach unraveling the business relationship.

Scott Freidman and I have helped many business owners resolve the complex issues that arise from the end of a business relationship.  We  help business owners resolve disputes in a way that minimizes the distraction, disruption and expense those disputes can cause.  If you’d like to talk to someone confidentially about your particular situation, give us a call on +61 2 9231 2466 to book a time to get some clear guidance on your options.