What is a Business Divorce? And Why Are They Happening Now? (Part I)

What is a Business Divorce? And Why Are They Happening Now? Part I

With light at the end of the COVID-19 tunnel, business owners and investors should understand the very real potential for another uptick in Business Divorces and may wish to examine their current positions with respect to their own partners, investors, businesses and investments.  Lee Weinberg has some thoughts on these issues. 

COVID-19 has had far-reaching implications for businesses, large and small, both direct and indirect. While publicly-held companies have a diversified investor and owner base with a corporate structure and management to address their business issues, most closely-held businesses do not. Instead, many closely-held businesses have two or three “partners” and one or two major investors, and may need to revisit and address unresolved governance and partnership issues.* 

So, what is business divorce? It is not dissimilar to a marital divorce, except it is a time when business partners or investors want or need to separate—a common situation. After all, while 50% of personal marriages end in divorce, an even greater percentage of business partnerships and investor relationships come to an end. And when one or more of the partners move to separate, the path forward can be a struggle, and just as costly both financially and time-wise. 

Business divorces often arise when the results and/or needs of the business change. 

When business is profitable, closely-held businesses usually run smoothly and partners tend to act agreeably. Sometimes, however, disputes may arise regarding how to split a growing pie, especially when the value of the enterprise is predicted to increase substantially. 

When revenues and profits fall, the partners in closely-held businesses may respond in an even more dramatic fashion. This is because individuals often react differently to times of great stress or change. When such individuals (or their investors) have a different willingness or ability to tolerate business pain, some or all of them may seek a way out via a “business divorce.” 

As we see light at the end of the COVID-19 tunnel, some partners will find that even though they did not see eye-to-eye with their partners during the pandemic, they don’t see the point in rocking the boat until the crisis ends and business improves. 

Here is a non-exhaustive list of reasons for a business divorce, each of which could be inflamed by the effects and timing of the current pandemic and associated government “opening” and “closing” edicts:

  • Goals of the partners. Perhaps one of the partners wants to move to where extended family lives, stop traveling, slow down a bit or even retire. In such a situation, it is very common that (i) the party who wants a change will still feel he or she deserves to receive the same payment as before from the company, and (ii) the other parties involved or invested in the business will be unhappy with the relocating or “slowing down” party. 
  • Investor burn-out. Investors tire of an investment, or a company tires of an investor: The current pandemic is likely a touchstone for many investors who need to decide where their investment dollars will be most effectively parlayed, and a company bringing in new capital may need a current investor to cooperate or leave. 
  • Family disputes. Disputes that involve family may or may not be about the business itself. Sometimes it is when one family member feels he or she is not being treated well or as well as siblings or cousins. Sometimes a family member has to work at the company while siblings simply collect “their share” of the profits. Sometimes a family wants a “bad egg” out of the family business. All of these situations can lead to a very personal resentment. 

In part II of this article, we will explore the different ways to handle partner disputes, and also some ways to avoid them entirely. 

[Lee Weinberg is a partner in the Los Angeles office of Weinberg Gonser. He regularly handles partnership disputes and business divorces associated with privately held companies.] 

Footnote: 

* The generic terms “partner” and “partnership” are used herein to cover corporations and their shareholders, limited liability companies and their members and managers, in addition to their more technical application to the partners of limited and general partnerships.