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Divorcing your business partner

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Q I’m thinking about “divorcing” my business partner, how should I go about it?

A. The first thing to do is check your agreements (if you have any) and work out the actual nature of your relationship. Many people use the phrase “business partner” but not everyone, technically, is in partnership. Different rules apply depending on the nature of your legal relationship, you may be:

•    in partnership (in which case the Partnership Act 1890 will apply in default of any agreement); or •    fellow shareholders and/or directors (in which case the Companies Act 2006 will apply, again subject to any variation by agreement). Just to complicate matters further, even if you are fellow shareholders/directors you may also be in a quasi partnership. •    members of a limited liability partnership (an “LLP”), a hybrid legal entity, and something of a misnomer since the legislation which governs LLPs (the Limited Liability Partnerships Act 2000) borrows more from the Companies Act than from the Partnership Act.

If you are uncertain, get professional advice.

The next step is to consider that your agreements may provide you with a means of separating from your business partner. See what they say. They may, if well drafted, have a formula by which one party can buy out the other or provide for a winding up of the business. If you have such an agreement you may not need much, if any legal advice. You will have spent your legal fees upfront. If you have no agreement in place, however, this is when taking such advice becomes quite critical to work out how best any such exit can be achieved. 

For instance if you are in partnership and you have no express agreement to the contrary, one partner giving the other notice can act to end the partnership straightaway. This may not be in your best interests should you be minded to carry on the business.  Take that professional advice as early as you can.

Step three is to work out what your objectives are in bringing the business relationship to an end and what, if anything, you want to take away from it. You need to assess how realistic those objectives are. What other consequences will flow from any such divorce? Does any party have restrictive covenants? How will that affect you going forward?  What is the status of any lease? In whose name is it held? What would be the impact of any exit on the lease? What is the position with your bank? What monies are due to or by the business to third parties?  

You then have to ask yourself: can you do a deal? Plainly, if you can reach a deal with your business partner quickly, this will be preferable to an extended debate about value.  Knowing the strength of your bargaining position is going to be important in any such negotiation. Commercial divorces can be as emotionally charged and acrimonious as any matrimonial divorce.

Finally, you need to  document your agreement. It does not have to be very detailed, but you need to ensure that the basis on which you part company is clear: who gets what assets, for what value etc? Do make sure that all parties affected by the agreement sign it and are bound by it

Rowena Herdman-Smith is a partner, Mishcon de ReyaRelated articlesUnderstanding workplace dispute lawsConcern over new dismissal lawsWhat are the new minimum paid leave entitlements?

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