After the Love is Gone

What happens when business partners must part ways?

One of the most thrilling times in an entrepeneur's life is that moment when they start out onto a new venture - starting a new business! It's that much better when that venture is started with a good friend, or at least someone close enough to become a business partner. But what happens when the business relationship has run its course? I don't mean when the business has reached the point where the owners plan on selling it outright, or merging with another corporation - or even going public. This post is about steps to take when one or more founding members of a company decide to walk away. What needs to be done?

Who gets what?

The primary issue that will be first on everyone's mind is not, "what administrative steps do we follow to make this change?" but instead, "how much is the departing partner receiving?" This is what the departing and remaining members of the company want to know, first and foremost.

Things to consider when determining value 1. How much did the departing partner invest? 2. How much is their stock worth? 3. Were there any agreements as to retention of intellectual property or does the business own it? 4. What is the value of the stock/membership interest of the business in general? 5. Are there agreements in place regarding stock options and excercising them after a certain period of participation in the company?

Of course, there will likely be more issues that arise, some of which may be specific to the business or industry in which it operates. Determining the specifics is best left to your attorney and accountant.

Will they be allowed to compete?

Just as important (or perhaps even more important) as determining what amount the exiting partner will leave with, is deteremining where he will be going with it. If the partner has skills, good will, or intellectual property he is bringing with him, then it is highly likely that he will be in direct competition with your business. Indeed, often times people leave businesses to start another, similar one due to the fact that they have become disillusioned with the operation of the business they are seeking to leave.

It will be very important to consider the implementation of a noncompete agreement for a reasonable amount of time and reasonable geographical area in order to prevent the exiting partner from directly competing with his former business and siphoning customers away using his name and the good will of the company. Any good business attorney knows what can and cannot be included in a valid noncompete agreement so that it holds up in court.

Must you Rewrite Corporate Documents?

One of the beautiful parts of corporations and other business types is that the business entity exists in and of itself. If the documents used to create the business were drafted appropriately, then it does not necessarily matter who enters or exits the business over the course of its operating because it runs according to a certain set of rules determined at the outset and modified over time if necessary. Assuming your documents were drafted appropriately and with a changing of the guard anticipated, then there is very little to worry about - except in the case where a major element of the business's operation involves some type of intellectual property that is being taken by the departing member of the company. However, if the company was established as a trio or duo and one or more of the members is leaving, it might be a good idea to review the bylaws and other corporate governance documents to make sure everything still fits and makes sense for the successful operation of the company by a single member or a partnership.

Filing the Paperwork

This is probably the easiest part of the process. Generally, in Massachusetts, all that is required is the filing of a certain form listing changes to the members, owners, or major shareholders of a company for recordkeeping purposes. There are minimal fees required for filing and the process is relatively simple.

As I said at the outset, this is the easiest part of the process and generally the first thing people think of. I put it last because this is the final part of the process, after everything else has been considered, decided, and agreed upon. The formal filing of documents with the Secretary of State simply memorializes the final outcome of who is left, and in what position, after the dust has settled. This is honestly the last thing to consider and think about.

Having a clean exit from a business is very much possible when the departing and remaining members are all in agreement and professional about the matter. However, what happens more often than not is that it seems fine until someone brings up money, property, rights, valuation, and other issues that affect the pocketbook. In those cases a seasoned and qualified attorney can mean the difference between a nasty, drawn out battle or a professional resolution to a dispute. Either way, it is not advisable to go it alone.