Mitigate the Damages in Business Divorce Through the Use of ADR
As is true with other relationships, some business relationships do not stand the test of time. Whether it be the stress caused by weak financial performance, lopsided efforts, differing opinions regarding employees, management style, reinvestment in the business, distributions, or any of a long list of possible friction points, co-owners of businesses sometimes reach the breaking point.
After having invested a substantial amount of time and capital into building and growing a business, owners frequently feel the business is a part of their very being. As such, when conflict arises between owners, those conflicts usually involve a high level of emotion. What follows is usually a result of whether any previous effort was made to address potential future discord, and whether these clients can compartmentalize their emotional frustrations to find a solution that does not destroy their prior business efforts.
Poor or no planning for potential disagreement can lead to a variety of negative results. A few of these potential results are substantial litigation expenses, drop in employee morale, customers withdrawing to avoid the fallout, a substantial devaluation of the business, and loss of longtime friendships. Sometimes co-owners “get it” and look for a better option, but, without proper planning, the emotional strife between the co-owners often takes the situation down a destructive path. Many litigators can provide stories of co-owners entangled in battles through which the underlying businesses were destroyed. However, with proper planning or with proper perspective, co-owners can mitigate the damage and move on.
The owners’ agreement, be it a shareholders’ agreement, operating agreement, partnership agreement, etc., can and should function much like a prenuptial agreement. As is the case with a prenuptial agreement, co-owners agreeing on certain aspects of their potential future business divorce is much easier to accomplish pre-dispute. Co-owners can agree on a large variety of issues, such as how the business will be valued, will there be a buy/sell agreement (and, if so, what type), what happens if a co-owner dies, gets a marital divorce, becomes disabled, and/or is bored with the business and wants to move on to something new. A substantial part of the planning conversation needs to be focused on how disputes are going to be resolved.
In these situations, whether provided for in the governing documents, or agreed upon at the suggestion of litigation counsel, mediation and arbitration are well-suited to resolve these disputes. Pre-litigation / pre-arbitration mediation is often particularly useful in a business divorce. This occurs early in the dispute process. As such, the parties are often less entrenched in a war of attrition (or, more likely, mutual destruction), and the business has likely not publicly displayed the symptoms of the underlying problems.
If successful, this early mediation can provide the co-owners an opportunity to maximize the value of their business so as to provide the best possible solution, which often involves preserving the business and one, more, or all of the current owners exiting. While employees are perceptive, the impact on employee morale is likely substantially less than an all-out battle. Moreover, a swifter resolution likely does not cause a substantial disruption of business.
However, if the co-owners do not attempt mediation early in the process of a business divorce, mediation is always an available tool at any time throughout the dispute. Mediation gives business owners the opportunity to exercise control over the situation before the matter is turned over to one or more third parties. That control should be of substantial value to the business owners. A jury will never be more invested in the situation or better understand the business better than the business owners. The solutions that can be crafted in mediation by the owners are usually far superior to the solutions that can be provided by a court.
What if mediation fails? While mediation has a high likelihood of success, on occasion the parties do not reach a resolution. When this occurs in a business divorce, the co-owners would likely benefit substantially from having their dispute submitted to arbitration. There are numerous substantial benefits to the co-owners associated with arbitration over litigation. The parties can select an arbitrator with a business background.
As such, he or she is much more likely to understand and appreciate the business issues faced in the matter. In addition, the arbitration is private. As such, damage to employee morale, negative customer impact, and business devaluation are much less likely to occur. In addition, arbitration can often provide an expedited conclusion.
With proper planning and/or advice from counsel, the end of the business relationship does not necessarily have to mean the decimation of the business value. An emotionally charged disagreement between co-owners does not have to mean that everything worked for must be put at risk. Whether assisting owners in preparing governing documents, or advising owners after a dispute has arisen, consider the use of mediation and arbitration for the business divorce. Through mediation, owners can craft resolutions that actually work. If mediation efforts fail, arbitration provides substantial benefits to business owners over traditional litigation. Although some business relationships must come to an end, mediation and arbitration both provide tools to assist business owners in their efforts to mitigate the damage and maximize value in a business divorce.
Be sure to listen to our most recent podcast on business divorce with Matt Thiry featuring Rett Peaden.
ABOUT THE AUTHOR
Matt Thiry, Esq. is a mediator and arbitrator in Atlanta. He specializes in business, fiduciary, real estate, and probate. To schedule a mediation or arbitration with Matt, please call 678-320-9118 or visit his online calendar.