The High Cost of Dissolving Business Partnerships
Starting a business partnership often begins with the best of intentions. You and your prospective partner are brimming with enthusiasm and can’t wait to combine your skills and resources to take on the world. However, what many entrepreneurs don’t anticipate is the potential for partnerships to sour. When these relationships break down, they can become some of the most legally complicated issues a business owner will face—and they are not cheap to unravel.
Why Partnerships Break Down & Dissolve
Understanding why partnerships may lead to dissolving is crucial for entrepreneurs to anticipate and preempt potential issues. The reasons can be as diverse as the partnerships themselves. Personality clashes, diverging visions, unequal workloads, financial disagreements, or simply personal growth can drive a wedge between what once seemed like a solid business union.
When partnerships are formed, they often lack the foresight to consider “what ifs.” But it’s precisely those “what if” scenarios that can cost businesses substantial time, money, and even their viability. Here are common scenarios that precipitate break-ups:
Vision Misalignment
At the outset, partners may have aligned goals for their business, but these can shift over time. One partner’s desire for rapid expansion may conflict with another’s aim for stability and sustainable growth, leading to irreconcilable differences.
Financial Disputes
Financial mismanagement or lack of clarity on roles and responsibilities within the business can cause tension. If profits don’t meet expectations or if expenses aren’t being handled in a transparent manner, it can damage the partnership.
Partnership Stress
The day-to-day stresses of running a business can take a toll. When partners don’t have effective communication channels or if there’s a lack of respect, these stresses can magnify, leading to a breakdown in the relationship.
External Factors
Changes in the market, new competitors, or economic downturns can create challenges that test the strength of the partnership. How these external factors are navigated can often be divisive.
Legal Costs and Implications of a Dissolution
When a business partnership dissolves, the legal implications can be significant. These costs arise from untangling the assets, debts, and operational aspects that the partnership entwined, and the sum of these parts can be complex.
Asset Division
The business likely has assets that were acquired during the partnership. Determining how these assets are distributed among the former partners is a difficult process, especially when there are no clear guidelines in place.
Debt Resolutions
Partnership debts need to be resolved, which can sometimes mean that partners will need to assume personal responsibility. This is especially true in partnerships where business loans or lines of credit were secured based on personal credit.
Business Structure Changes
In many cases, a business structure must change after a partnership ends. Whether it’s a dissolution, a reformation, or just a change in legal status, these shifts come with regulatory hoops to jump through and associated legal costs.
Disputes and Litigation
Unfortunately, some partnership issues can only be resolved through litigation. This route is where costs can quickly spiral out of control, as legal actions often involve arbitration, court fees, and the cost of legal representation.
Prevention is Cheaper Than Cure
It is said, “an ounce of prevention is worth a pound of cure,” and it couldn’t be truer for partnerships. Taking measures early on can save substantial cost and heartache down the line. These include:
Clear Operating Agreements
A watertight operating agreement that is agreed upon and signed by all partners outlines roles, responsibilities, profit-sharing, and what will happen should the partnership dissolve. It is an invaluable document when partnerships turn south.
Periodic Reviews
Partnerships, like any relationship, require maintenance. Periodic reviews of the business and partnership agreements can help detect and address issues before they snowball into irreconcilable differences.
Exit Strategies
Smart partnerships have exit strategies in place, even at inception. These detail under what circumstances a partner may leave the business and what the process and terms are for the buyout or division of assets.
Legal Counsel
From the outset of a partnership and at the first sign of trouble, seeking legal counsel is a wise move. An experienced business attorney can help draft agreements, mediate disputes, and provide clarity on legal issues before they become problems.
The Human Cost
Cohesion between business partners often mirrors close personal relationships, and the breakdown can be as emotionally draining. This “soft” cost is particularly challenging to quantify but shouldn’t be underestimated.
Emotional Toll
The dissolution of a partnership can be fraught with anger, sadness, and betrayal. These emotions can cloud judgment and impact how partners negotiate the legal aspects of the split.
Reputational Risk
Partnership dissolutions can lead to damage to the business’s reputation, especially if they are not amicable. This can impact customer trust, supplier relationships, and the ability to attract new partners or investors.
Navigating the Break-Up
Partnerships are the bedrock of many successful businesses, but they can also be one of the most expensive aspects to unwind. Remember, the cost of a good attorney at the start of a partnership often pales in comparison to the cost of a bad one at the end.
Law 4 Small Business. A little law now can save a lot later. A Slingshot company.
Author: Larry Donahue
Larry Donahue is a managing member of the firm, with 30-years of experience as an attorney with a focus on Internet law, intellectual property, corporate law, and contracts. Larry leads the firm’s Internet sales efforts. He is licensed in the states of Illinois and New Mexico, as well as at the United States Patent and Trademark Office (USPTO).
