Level Up: Breaking Up With Your Business Partner
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Question from Luke, Syracuse, NY:
“I started a business with my friend and it was going great at first. Now it seems that we have different ideas on how things should be run and the future of our company. I want to “break up” with them, but I don’t know-how.”
Answer from Lindsay Karas Stencel, Partner, Thompson Hine LLP:
Breaking up can be hard to do (sometimes).
First, let me caveat this in saying that this does not constitute legal advice and you should call your counselor to discuss your specific situation and fact set.
Now that the lawyer mumbo jumbo is out of the way, let's just acknowledge that we all get very excited and want to dive right in on a new endeavor when we believe in it! It's exciting and you could be changing the world with what you undertake. That is why it is crucially important to talk about breaking up before you get engaged with a partner or several partners so everyone knows what their responsibilities are, what the expectations are of them, and how the parties can break up if you want or need to at some point in the future. At the beginning, everyone is happy and excited so it is a good place to discuss breaking up, because no one thinks it will ever happen. So, my first thought would be to look to any documents executed which should set out how any break up should go. Break ups, or splits, are typically very contractually driven so you should follow the steps precisely as laid out in those documents.
Now, if you don't have any documents, that is not the end of the world, but it does make it a little more challenging, and candidly, will probably also make it more expensive to resolve. If you have not, you should have a lawyer and your partner should have a different lawyer, but it is the business people should work to keep the lines of communication open to resolve the issues and work to an amicable resolution. Assuming you can do that, the lawyers are really only there to draft and review the documentation so that each party has their interests represented.
Things that you should discuss while breaking up with a co-founder include, but aren't limited to:
Who continues to own the business or its assets, including intellectual property, post break up?
Will anyone be buying the other out of the business, and if yes, for how much?
Will both parties continue to be able to compete with the existing business?
If there are any outstanding obligations of the business, who will be responsible for those?
Who will be responsible for each of the operational steps to transition any business items or assets among the partners?
There's naturally more questions, but those are ones you can reasonably expect to arise, and once you have resolution on those, all parties should work to efficiently and accurately document the intentions and understandings of the parties (because memories have a funny way of changing things over time).
If there is bad blood between the parties, all of this will be far more difficult, and may result in mediation or litigation, so it is best to ensure that you have great advisors who have been through this all before and can provide you with sound advice on your next steps.
Ultimately, cooler heads always prevail, so be calm. Be fair. Be open, and be quick to execute one whatever the parties agree to.
Good luck!