Planning For a Business Break-up

There is a great article in the Globe and Mail this week about the breakup of the business partnership behind the popular restaurant Le Papillon.

 

The story is an excellent example of what can go right when people plan ahead for the future of a business, and when, failing that, they act reasonably in the business’ evolution.  I think the co-sharing agreement regarding the branding is ingenious, and although the lawyer in me shudders at all of the potential for disaster such an arrangement entails, the business person in me revels in the simple elegance of the plan.

 

The story doesn’t, however, tell of all of the things that can and do go wrong when partners fail to plan for eventualities.  In a blatant attempt to scare you into making that sort of plan, let me give you a brief rundown of some recent situations I’ve encountered:

 

  • A well-funded group of business people started a new media corporation, with the intention of establishing a ground-breaking online social media website.  Despite several meetings to iron out the details of a comprehensive shareholders agreement, the document was never signed.  A year later, the shareholders were trying to push out one of the original investors for a failure to comply with their expectations.  Referrals to several litigation firms followed.  It’ll be tens to hundreds of thousands of dollars in legal fees and years before the dispute is settled.  Funding to launch the website was tied up in legal expenses, thus making the whole thing virtually worthless.

 

  • Two partners setting up a health club decide, against my advice, to go ahead and set up the business, incur debts and seek out financing, prior to papering their arrangement.  A minor fraud involving the planned lease of gym equipment spiraled into the loss of their financing, which in turn lead to their personal liability for a lease, as well as potential litigation from hundreds of gym members.  The litigators took over that one as well.

 

  • Two corporations with a years-long joint venture-type relationship got into a dispute about the allocation of income.  When they brought the written agreements to us, it was clear that they had been drafted by the business people involved, who relied on found precedents that did not include many of the issues that were relevant to the parties, and were never reviewed by legal counsel.  The documents turned out to be worthless in terms of settling the dispute.  The parties are now faced with the prospect of litigating or setting aside their differences until they can figure out how to extricate themselves from the venture.

 

We’ve seen what can go wrong and we know where the pitfalls are.  Before getting into a business arrangement, or before going further down the road in your current arrangement without a plan, talk to me about planning for any future eventualities, before they happen.

 

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