Business breakups can be as complex and emotionally charged as personal divorces. Whether due to financial difficulties, disputes among partners, or unforeseen circumstances, businesses often face separations that require careful legal and financial planning.

Common Reasons for Business Breakups

Every business faces challenges, but not all survive long-term. Some owners fail to plan, while others encounter external circumstances beyond their control. Janel Dressen explains that owners can recognize warning signs early by understanding the most common reasons for business breakups. The three most common factors that can lead to business separations are:

• Emotional Factors: Disagreements, fraud, or perceived inequities among owners.
• Financial Factors: Retirement, bankruptcy, or a partner seeking better opportunities elsewhere.
• Unforeseen Circumstances: Death, disability, or market shifts that make continued operation unsustainable.

John Levitske adds that mismanagement and poor planning also play significant roles. Failure to adapt to market changes, regulatory shifts, or inflationary pressures can gradually erode a business’s foundation.

The Eight ‘D’s’ of Business Breakups

Even the most successful businesses can face unexpected challenges that lead to dissolution. Experts have identified eight common triggers that often force companies into breakups. The most common 8 reasons for business breakups are:

1. Death: What happens when a key owner passes away?
2. Divorce: Can an owner’s spouse claim a stake in the company?
3. Disability: What if a leader becomes unable to fulfill their role?
4. Dissension: Disputes among owners can lead to gridlock.
5. Dissolution: Sometimes, shutting down is the best option.
6. Departure: Retirement or voluntary exit of a key stakeholder.
7. Debt Overload: When financial strain leads to insolvency.
8. Decline of Market: External economic conditions forcing closure.

Megan Becwar explains that businesses can avoid turmoil by proactively addressing these scenarios through legal agreements that outline the process for handling ownership changes.

The Importance of Buy-Sell Agreements

A buy-sell agreement is a legally binding contract that outlines how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business. This agreement can prevent conflicts by setting terms for the transfer of ownership. For instance, in the event of an owner’s death, the agreement can stipulate that the remaining owners have the option to purchase the deceased owner’s share, preventing unwanted parties from acquiring a stake in the business. The broader point is that the parties are free to contract as they desire.

Addressing Shareholder Oppression

Shareholder oppression occurs when majority shareholders take actions that unfairly prejudice minority shareholders. This can include withholding dividends, denying access to information, or forcing the sale of shares at an unfairly low price. Implementing protective provisions, such as supermajority voting requirements or rights to compel dissolution, can safeguard minority shareholders’ interests.

Valuation Methods in Business Breakups

There are three primary valuation approaches:

1. Income Approach: This method assesses the present value of expected future cash flows, often using the Discounted Cash Flow (DCF) method.
2. Asset Approach: This approach evaluates the company’s tangible and intangible assets, subtracting liabilities to determine net asset value.
3. Market Approach: This method compares the business to similar companies that have recently been sold, using metrics like price-to-earnings ratios.

Selecting the appropriate valuation method depends on the business’s nature and the specific circumstances of the breakup. While a business owner can certainly take a position on its value, it is common to hire qualified business valuation experts.

Alternative Dispute Resolution: Arbitration and Mediation

Litigation can be costly and time-consuming. Alternative dispute resolution (ADR) methods, such as arbitration and mediation, can often address conflicts more efficiently. ADR can be conducted in many ways. For example, ’baseball arbitration’ requires each party to submit a proposed resolution, and the arbitrator selects one, encouraging reasonable proposals from both sides.

Planning Ahead to Prevent Disputes

Proactive measures, such as drafting comprehensive agreements and regularly reviewing them, can help prevent conflicts. Harold Israel notes that many business owners avoid planning for potential breakups due to optimism or a focus on daily operations. However, failing to plan can make disputes more expensive and time-consuming when they arise.

Conclusion

Business breakups are challenging, but with proactive planning and clear agreements, owners can navigate these situations more effectively. Consulting with legal and financial professionals to establish buy-sell agreements, protect minority shareholders, and determine appropriate valuation methods can mitigate risks and ensure a fair resolution.

To learn more about this topic view Complex Financial Litigation / Common Issues and Strategies in Business Breakups. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about business breakups.

This article was originally published on February 21, 2025.

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