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.