Anita Deal and Ivana Bie formed their commercial real estate business Dirt Cheap, LLC several years ago. Through 2007 it was wildly successful. Then the bottom fell out. Their friendship, tenacity and cash reserves are waning. Ivana believes that the market has turned and that now is the greatest real estate buying opportunity of all time. Anita isn’t so sure. Worse yet, their bank requires them both to sign new guaranties and to put up more collateral. Anita wants out. What should they do?
Anita and Ivana should first review the Dirt Cheap, LLC formation documents. Ideally, the parties signed a buy-sell, dissolution or comparable organizational agreement pursuant to which they agreed to an orderly procedure for one to buy out the other in the event of a death, disability, marital divorce or business divorce of the partners. Ideally, their agreement addresses how business debts and liabilities are assumed and how the assets are divided or otherwise accounted for. Properly drafted, their agreement should be tailored to fit their company’s business model, their personal relationship and needs, and the nature of the entity (corporation, partnership, limited liability company, joint venture, etc). The concept of an orderly agreement for transition from both Anita and Ivana to only one of them requires thoughtful pre-planning.
Tilting the Scales in Your Favor.
If you find yourself needing to get a “business divorce,” you will want to do so in such a way as to maximize value, to reduce time and expense, to accomplish an amicable separation, and to preserve current and future business relationships. If so:
- Review the Organizational Documents. Determine if there is already an agreed process for an orderly and amicable business “divorce.” If you do not already have a business dissolution agreement, consider getting one. Very much like dying without a will, not having a written plan for your business will throw you at the mercy of Texas statutory and case law and the vagaries of the Texas judicial system. Much like a court appointed administrator to preside over your post-death estate, a court appointed receiver oversees the dissolution and distribution of a business to “wind down” the affairs of the company.
- Review Your Financials. Starting with the same current financial information, Anita and Ivana should evaluate the company’s assets and the liabilities and the best way to maximize value to both. Don’t forget that the company’s creditors, particularly those who hold personal guaranties of the owners will have certain contractual rights in the dissolution process.
- Commit Your Separation to Writing. Memories can be short. Any agreed separation and dissolution will have continuing obligations of the past and future owners. Committing that understanding to writing before splitting the sheets better enables all concerned to remember what they agreed to do and by when. Consider formally dissolving your business with the Texas Secretary of State. Each business entity has its own particulars, for example the dissolution of a Texas Limited Liability Company.
- Consider Mediation. If you can’t agree, before things get out of hand you might want to consider getting an unbiased third party who can keep the communication lines open, ask good questions and encourage unemotional dialogue.
- Don’t Wait Until It’s Too Late. If you don’t tend to your business you run the risk of bad credit, bad health, lost relationships and customers, potential lawsuits with former partners, lenders, vendors and customers. The long term risk and cost could easily exceed any perceived short term savings.