May 13, 2011

When you enter into a partnership, a messy divorce is the last thing on your mind. But it happens all the time, according to David Doggett, a corporate attorney and principal of Doggett Law Firm in San Antonio, TX. He’s seen partnerships break up as a result of everything from disagreements over new product development to accusations of accounting fraud. “When it’s about something personal, that’s when things can get ugly,” he says.

Resolving these disputes is rarely pleasant or easy. But you can do a great deal to speed up and smooth the process.

Hire two lawyers

First, choose an attorney experienced at negotiating break-up agreements. If the divorce is particularly acrimonious, you need to be prepared for the level of animosity to escalate; you may end up in court. With that in mind, says Doggett, it’s wise to secure the services of a litigator who can take over ahead of time. Often, he’ll consult with a trial lawyer early in the negotiations to prepare the groundwork just in case. It’s not cheap, says Doggett, but “in the long run, it’s less costly to do it this way.”

Even if you don’t go to trial, the services of a litigator can come in handy. A letter from a trial lawyer, for example, can carry more weight than one from your business attorney. “If [the opposition] gets a letter from me, the other side may assume we’re bluffing,” says Doggett. “If it comes from an expert trial lawyer, you might get a quicker response.”

Figure out what outcome you’re shooting for

In any business breakup, there are a few ways to go about it: you can buy out your partner, or vice versa; you can divide the company between the two of you; or you can sell the business to a third party. It’s best to begin negotiations knowing which option you prefer.

Be prepared to sweat the details 

Often, according to Doggett, it’s not the larger questions that cause the most contention. Instead, the hot button issues involve the small stuff. He points to the owners of a construction business who decided to split the company by division. The partner who led the commercial unit would get that part of the firm, while the other owner would take control of the firm’s residential business. Once that was decided, however, the real fight began—resolving questions surrounding how to divide up the rest of the assets, from trailers carrying construction equipment to computers. “People often fight over the smallest things,” says Doggett.

Ask for mediation right away

Although you still need an attorney, it’s one way to reduce your legal fees. You and your partner would sit in different rooms, while the mediator shuttles back and forth hearing both sides of the story. Typically, mediators try to get cases resolved in one day.

One downside: there generally are too many issues for a mediator to address fully in one session. As a result, the agreement can end up with stipulations that are vague, causing more disagreements later on. For that reason, it’s best to think through all the complexities and draw up a proposed contract ahead of time. “Being more prepared than your opponent confers a significant tactical advantage,” says Doggett.

Figure out how you want to value the company

That’s especially important if one owner is going to buy the other out and there’s no existing buy-sell agreement. But it’s easier said than done if you’re in an intense dispute with your partner. For that reason, you should think through your options ahead of time.

One tactic is to simply hire a third-party appraiser. Another is what Doggett calls “baseball arbitration,” in which an arbitrator who also is an appraiser is called in. Each side presents what he or she thinks the correct valuation should be and the arbitrator chooses one.

Yet another approach, is for one owner to propose a price and terms for purchasing the company. The other party then can either accept that offer or buy out the owner at the same terms. The advantage? This approach motivates the partner coming up with the price to suggest more reasonable terms. “If the two sides can’t agree on a price, it’s a better solution than going into litigation,” says Doggett.

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