This series focuses on “business divorce,” the break-up of a business between business owners due to disagreement or other circumstances. A business break-up leads to either one owner continuing the business without the other owner, the forced sale of the business to a third party, or a total dissolution or winding up of the affairs of the business. Because the situation can be contentious, it may lead to unnecessary litigation. Shutting a business is often not a viable option, so it may be better for one member to either buy out the other member or sell its stake to the other member. Thus, it may be good for business owners to think ahead, discuss, and consider preparing an exit plan where one business owner may exit sooner than the other, in effect like a business prenuptial agreement.
This will be a multi-post blog entry. Our earlier post highlighted certain aspects of ownership of assets, which business owners may want to start thinking about, once they realize that one owner may exit the business sooner than the other. Our earlier post can be found at www.mcbrideattorneys.com/blog. This third post discusses “what” aspects the continuing business owner should consider prior to the outgoing business owner’s exit, such that the business is protected operationally.
Post 3 – How Can Business Owners Protect Their Business Operationally
In most businesses it is probable that one business owner will exit sooner than the other, so the owners must think ahead on how to protect the business operationally to ensure minimal disruption to the day-to-day running of the business upon the outgoing owner’s exit.
Continuing Business Owner – Aspects To Consider
On the operational side, the continuing owner should consider making a list of specific powers and authorities given to the outgoing business owner during the course of the operation of the business. These may be delegated by way of powers of attorney, board resolutions or otherwise. By virtue of these authorizations, the outgoing owner has the potential to bind the company by its acts in the regular course of business (e.g., signing company checks as the authorized officer, authority to obtain loans or purchase certain assets). At the time of the outgoing business owner’s exit, having a checklist of delegated powers that should be revoked will prove useful for the continuing business owner. The nature of delegations and powers will largely depend on the size of the company and type of business.
Because legal authority exists that a third party who does not know of a change in ownership can still rely on the outgoing owner’s authority to bind the company, notifications to customers, suppliers and others should be carefully considered.
Other operational areas may also be affected by a change in company’s ownership structure. If the outgoing owner is covered by the company’s liability indemnity insurance for acts done in the regular course of business, the insurance may need to be adjusted upon exit. The exit of the outgoing member may have legal and tax implications for the business. It is a good idea to discuss these aspects with the company’s legal and tax consultants ahead of the exit, giving the business owner time to plan and prepare to implement any changes that are necessary (e.g., the tax structure of the company upon the other owner’s exit). Finally, the continuing business owner should factor in the outgoing business owner’s entitlements and benefits as per the internal company agreement between them while planning and preparing the outgoing owner’s final pay-out.
These are just a few scenarios that continuing business owners may encounter. Overall, the aim should be to automate systems and processes which operationally adapt to the new situation of the outgoing business owner’s absence to avoid any lapses.
Our next post will focus on certain aspects that the outgoing business owner should think of ahead of an exit.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.About the AuthorR. Shawn McBride — is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride Law Firm or call (214) 418-0258.