Business Divorce – It Ain’t Pretty

“My dad doesn’t live with us anymore.  He lives in New York and drives a taxi.  My mom hopes he’s going to die real soon.” – Dialogue from the movie Kindergarten Cop

At this point in my career, I have lost track of the number of clients that have suffered through an ugly separation of ownership.  Fortunately, from my perspective, the statistics do not seem to mirror the rising number of family divorces, but that doesn’t mean that they are any less emotional, costly or time consuming.  In fact, my good friends at a regional law firm have a practice called Business Divorce.  If you can build a practice around it, I guess it is pretty prevalent.  So, as I work through another round of business separations, I thought it might be helpful to point out a few ways to avoid this situation:

The first is the obvious (at least to me) – choose a partner or partners wisely.  Just as in real life, don’t just look at what each brings to the table, but how compatible you are.  Every business will go through cycles – those ups and downs that make business life both interesting and frightening.  You need to take some time to understand how you will ride the waves together.

Next, there is ownership and there is voting power and the two should be considered separately.  For example, when looking at a funding source, granting an ownership interest versus a voting interest is not the same.  I experienced an individual who helped a company find a bank and earned a 30% ownership in the business.  While the economic pain was hard to deal with (the principal owner never forgave himself for that decision), the individual had no real knowledge of the business and more time was wasted by management explaining every move it made. The lack of focus on external matters was in my opinion one of the reasons the business failed.

I am sorry but 50/50 or equal voting deals are not one of my favorites.  I can rattle off half a dozen failures with this structure. Perhaps the worst was the father who owned 100% of a business and left it to two of his two siblings equally when he passed. They had equal voting and economic ownership.  One really knew the business (and worked it) while the other considered it to be more of a hobby. Their constant infighting eventually resulted in the sale of the business long before it achieved its real value.  You can share the economics without sharing voting rights – it is not that hard.  I also find it hard to argue with the concept that somebody has to be in charge.

Finally, follow the old adage – do not get into a deal without knowing how you will get out.  The interplay of owners at the onset of a venture is much more amenable than facing each other when parties decide it is time to “go in a different direction.”  Early on in the relationship is the time to focus on this issue.

So, follow some simple rules and you and your Partners will have a nice long run as colleagues and friends – not spending your latter years wishing the worst for each other.

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