Unfortunately, disputes between shareholders, partners and members of closely held companies often lead to “business divorce.” Closely held, financial services businesses such as registered investment advisors are often the subject of litigation between their owners. I recently spoke to our expert on shareholder divorce issues, Scott Unger.
Scott advises that these internal conflicts arise from many causes, including: 1) using the business to pay for personal expenses; 2) an owner’s issues with industry regulators; 3) personality conflicts; 4) nepotism; 5) using the business to advance only the interests of one partners; 6) marital problems; 7) drug and alcohol problems; 8) financial problems; and 9) discovery of partner embezzlement. When these conflicts reach a critical point a business divorce often occurs.
The direct and indirect economic and emotional costs of a business divorce can be staggering, Scott notes. Often times, third parties, such as the company’s employees, vendors and customers, are affected. Further, focusing on the litigation often results in less time spent with your clients and developing new ones.
If confronted with a business divorce situation, Scott counsels that often the best option is to try to resolve the dispute as quickly and painlessly as possible. Over ninety (90%) of business divorces settle. Understanding how these cases generally resolve is important, allowing you to get to the “finish line” as quickly as possible.
Generally, business divorces end with one side buying out the other, the business being divided, or the corporate entity being sold to another party. More often than not, they end with one side buying out the other. Mediation is often a wonderful tool to quickly and efficiently resolve the dispute in a mutually favorable manner.
Scott always tells prospective clients there are three major decisions to make early in the business divorce proceeding: 1) hiring right lawyer, 2) retaining the “right” business valuation expert, and 3) working with a good accountant or tax professional to guide you thru the matrix of complicated tax laws associated with the potential buyout and to help you make certain business decisions associated with any potential settlement.
There are several factors to consider in hiring the right lawyer. As the financial services industry is extremely regulated, your attorney must understand the privacy, compliance, and licensing issues associated with your industry as well as understand the complex laws governing business divorces. Your attorney should listen to you, keep you appraised of the status of your case and answer your questions, comments and concerns in a timely manner.
Finally, your attorney must understand your objectives, where the finish line is and work diligently and efficiently to get to there as quickly, painlessly and efficiently as possible is important. Litigation should not meander like the Mississippi River. Rather, it should fly straight like a private jet.
Often, the attorney will help you choose an expert to value the business. Scott advises that when selecting a business valuation expert, ensure the expert is not only qualified to offer the opinion but able to communicate and work with you and your attorney and effectively testify in court should the case need to be tried.
Business valuation is an art, not a science. Every business has a reasonable valuation range. By analogy, it’s like the uprights in a football stadium — anything between the two uprights is within the range of possible valuation range. It is not only important for your expert to give you the “litigation” valuation opinion but also explain where the reasonable settlement range lies.
Finally, you need to select a strong tax professional who will help guide you through the matrix of complex federal and state tax laws, which likely will be triggered by most results. This tax advisor should also help you make “cash flow” decisions regarding a potential buy-out of a former owner. A trusted, competent tax advisor should make sure you don’t take on more than you can handle.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York and Philadelphia that represents investment advisors, financial planners, BDs, CPA firms, registered reps and investment companies, and is a regular contributor to Investment Advisor. He can be reached at email@example.com.