Navigating Business Divorce: Key Considerations for Owners Facing Dissolution

Business divorce, or dissolution, often arises under unhappy circumstances. Key drivers include differing visions for the strategic direction of the company, disagreements over funding or commitment levels among partners, or even suspicions of fraud. A “triggering event,” such as suspected fraudulent activity, often leads to an unavoidable split. McGloin stresses the importance of liquidity, noting that without sufficient liquidity, parties involved in a business divorce may feel “handcuffed” in their ability to navigate the process effectively.

When a business divorce seems imminent, one of the initial challenges is determining which advisors to trust. Existing business advisors, such as accountants or lawyers, may not always be the right fit due to conflicts of interest. Professionals involved before the dissolution may find themselves unable to represent one party without bias. This is why it is often essential for owners to seek out specialised professionals who have experience in business divorces.

Schmidt highlights that experience in this area is key. Selecting advisors with the right experience ensures that both legal and financial aspects are managed thoroughly and without unintended complications.

Ideally, when a business is formed, owners should plan for the possibility of dissolution. Well-drafted organisational documents – such as bylaws or member agreements – can help outline an orderly exit strategy for partners. However, when no such provisions exist, or when circumstances deviate from the plan, owners must rely on legal mechanisms such as judicial dissolution or shareholder derivative actions.

Judicial dissolution often involves the sale of company assets and distribution of the proceeds, while a shareholder derivative action might aim at stopping misconduct by one or more partners. In most cases, however, business disputes end with one partner buying out the other or splitting the entity into separate businesses.

Fraud complicates the dissolution process significantly. When fraud is suspected, confidentiality becomes crucial, and steps must be taken quickly to prevent further damage. The importance of taking a measured approach is stressed, McGloin cautions against impulsive actions driven by emotional responses to fraud discovery, as this can lead to poor decision-making.

Schmidt adds that, when fraud is present, actions such as injunctions or asset attachments may be necessary to protect the company. It is essential to identify the extent of the fraud and take targeted actions to mitigate its impact. The “victim shareholder” must act strategically, ensuring they gather evidence and engage the right professionals before taking any steps that could alert the perpetrator.

Both Schmidt and McGloin agree that preventing future issues is as important as managing the current situation. Once a business divorce is complete, proactive measures – such as improved internal controls, compliance protocols, and regular audits – can help reduce the risk of similar problems arising again.

Even when relationships are amicable, partners should engage in “what if” scenarios. The best time to prepare for potential disputes down the line is while things are still running smoothly.

A business divorce is rarely straightforward, often involving emotional, legal and financial complexities. Seeking out the right specialist advisors, maintaining a strategic approach in fraud situations, and planning for potential dissolution in advance are all critical steps for successfully navigating these challenging waters. By taking these proactive measures, business owners can better protect their interests and ensure a smoother transition during times of upheaval.