All too frequently people go into business with a partner (or manager or member) without thinking through the end of that relationship. Things go well for a few years, then something happens that changes the dynamic. Perhaps the business starts faltering and profits are down, perhaps your partner no longer contributes as much as he or she did in the beginning. At some point, you realize a change is necessary and you need to get out of the partnership. Hopefully you planned for this occasion. If not, you will need to work out an agreement with your partner or go through a judicial dissolution to “breakup” with the business.
First, take a look at your organizational documents. Do you have a Shareholder Agreement, an LLC Operating Agreement or a Buy-Sell Agreement that provides for a way to get out of the business? Can you buy out your partner at a set price? Can he or she buy you out?
If you used an attorney to form your business, you likely have language that would answer some of these questions. Typically, a Shareholder Agreement or an LLC Operating Agreement would provide a way for one partner to buy out the other partner in a “deadlock situation” for a set price or a price determined by a pre-defined formula. A deadlock occurs when the Company cannot act because no agreement can be made among management. This can easily occur in a 50/50 ownership situation when you need both parties to act, or even in a situation where a “supermajority” is required to take some particular action and the supermajority cannot be reached.
Another typical provision in a Shareholder or LLC Agreement is “buy-sell” language. Such provision provides that at a certain time (for example, five years after formation) or event (for example, at the death or disability of one of the owners), one partner or the Company, has the right to buy out the other partner. Again, this type of provision will likely come with a set purchase price, a pre-determined formula, or an agreed-upon method to determine the purchase price (the Company hires an appraiser to set the price).
Second, have you talked to your partner about breaking up? Perhaps he or she would like to buy you out and would welcome the opportunity. Having a valuation or appraisal done by a third party is a good way to show that the price you are offering is good.
An attorney can help you prepare a letter of intent (LOI), which would provide a written offer containing an outline of the basic terms in the sale transaction: the purchase price, timing of the closing, and any post-closing obligations of the Seller (a non-compete). An LOI can kick-start the purchase process and smooth over later negotiations. While you may spend time submitting several offers in order to get to an agreement, if you can achieve resolution of the issues through this process, it can save a great deal of time and money by avoiding litigation.
Finally, if negotiations are not working, it may be time to consider that the Company will not survive and will need to be dissolved. There are two ways a Company can be dissolved: by the parties agreeing to dissolve the Company, or by a judge dissolving the Company. In this case, the differences between corporations and LLCs (or limited partnerships) can be very important. Under the Virginia corporate statute, two-thirds of the shareholders must agree on the dissolution of a corporation. Under the Virginia LLC status, unless the members have preempted the statute in their LLC Operating Agreement, all of the members must agree to dissolve the LLC. As you can see, it may be a difficult task to get owners to agree to a dissolution.
Without the necessary consent to approve a dissolution of the Company, in either the LLC or corporate context, members or shareholders may petition the court to order a judicial dissolution. For a corporation, the statute lists out many reasons that a Court would order a dissolution: the Board is deadlocked, the directors’ actions are “illegal, oppressive, or fraudulent,” the business has been abandoned, and others. For an LLC, a judge may order the dissolution “if it is not reasonably practicable to carry on the business in conformity with the articles of organization and any operating agreement.”
While breaking up is never fun, in the business context, planning for your exit should be part of the formation process. How long do you anticipate being active with the business? What would change that would make you want to get out of the business? How will you get out of the business? With proper planning, breaking up with your business doesn’t need to be (too) painful or costly. It may even give the business a fresh start.