Neil Sedaka said it best in his song, “Breaking Up is Hard To Do.” Whether you are faced with the end of a marriage or the end of a business relationship, breaking up is, at best, a difficult process.

Like a husband and wife entering into marriage, business owners enter into a business relationship with high hopes for success. If the owners are well-matched and it is managed properly, the business will likely thrive. However, as reflected by the economy in recent years, even the most successful of ideas may fail. When a business begins to struggle, the owners may determine that it is time to part ways.

The structure of the business will, to some degree, dictate how the break-up or termination of the business is handled. For example, while a sole proprietor may have issues with respect to employees who will lose their jobs as a result of a business termination, the sole proprietor does not have to deal with a soon-to-be ex-partner/business associate. Conversely, when two or more individuals or entities are involved, the break-up/termination process can quickly become unpleasant. Accordingly, it is more critical than ever to plan ahead for the worst.

The “Business Prenuptial Agreement”
Business owners who fail to negotiate a well-crafted agreement with their business partners may later find themselves entrenched in the equivalent of a nasty divorce. However, instead of fighting over children and the house, the soon-to-be ex-partners fight over customers and other assets of the business. A business prenuptial agreement can be in the form of a partnership agreement (in the case of a general or limited partnership), a shareholder agreement (in the case of a corporation), or an operating agreement (in the case of a limited liability company). Regardless of the business structure, the agreement should address several important matters.

The agreement should also include provisions for the determination of purchase price of the ownership interest and establish how the purchase price will be paid. Typically, the purchase price will be tied to the book value or the appraised value of the ownership interest at the time of the transfer.

The following is a list of common situations that may arise with respect to transfer of ownership:

While it may not be pleasant to plan for a business’ possible demise when it is just getting started, it is far easier to reach agreement when all parties are getting along than when the relationship has headed south. Accordingly, a well-drafted owners’ agreement can save many headaches and much expense in the future. iBi