Falling Out of Love in the Corporate Context: The Basics of “Business Divorce” Litigation
One of the few things I remember from being a Cub Scout is the famous slogan “Be Prepared”. As an 8 year-old, I don’t think I was 100% certain as to what that meant. What exactly was I preparing for? When I became a parent, the concept of “Be Prepared” definitely took on a meaning even if we never quite felt fully prepared. Today, when I’m counseling clients and we discuss what it means to “Be Prepared” business owners generally think in terms of what’s next. The question I like to ask is where do you see yourself and your business in three to five years? If the answer to that question includes retirement or the potential of a liquidity event, then my response is, it’s time to prepare.
Do I Have a Successor?
One of the first steps is to consider whether there are family members or key management personnel who are likely successors. If family or management succession is a possibility, you need to consider how that transfer of ownership will occur. Do you want the transfer to happen in a single transaction or over time in a series of transactions where you maintain some equity and control while the business is being transitioned?
You will also need to consider how the successors will pay you. Most likely they will not be able to pay upfront for the total value of your business, so you may need to structure the transfer with a promissory note secured by a pledge back of the shares. The length of the note will also be a consideration for both sides — a longer-term note gives the buyer more manageable payments, but it creates more risk for the seller that the business remains profitable enough for the buyer to service the debt.
Whether you already have a business partner or are bringing in a successor as a co-owner, it is equally important in an internal succession scenario to have a well-drafted buy-sell agreement in place. A buy-sell agreement establishes the terms under which ownership interests can or must be transferred, and it addresses triggering events that business owners often fail to plan for — death, disability, irreconcilable disagreement among owners, or voluntary departure. Without a buy-sell agreement, you are leaving critical decisions to be negotiated under duress, often at the worst possible time.
Preparing for a Third-Party Sale
What if there is no clear family or management successor? Then the most likely way to monetize the value of the business will be to sell it. Preparing for a sale involves many considerations beyond determining the sale value – though that alone is undeniably significant. I generally recommend that business owners engage a sell-side financial professional — or at a minimum obtain a valuation — well in advance of any anticipated sale, even if that sale is years away. Understanding the value of your business and the key drivers of that value will give you time to address any weaknesses before you go to market. Too many owners are surprised—often unpleasantly—by what their business is actually worth to a buyer as opposed to what it is worth to them.
Beyond valuation, preparing for a sale means structuring the transaction for the most efficient post-tax benefit. Depending on your entity structure and the nature of the transaction, various planning tools may be available to minimize the tax burden. However, many of these strategies have specific requirements and limitations, and the earlier you begin planning, the more options remain available to you.
Buyers will also need financial information they can rely on. This means audited or reviewed financial statements, transparency about revenue trends, customer concentration, and liabilities, and, in some cases, a quality of earnings report from an independent accounting firm. Further, buyers want to see personnel who can run the business without you, systems and processes that are documented and repeatable, and a management team that will stay through and beyond the transition.
Getting Your Corporate House In Order
It is also essential to the process that your company’s corporate house be in order. This means ensuring that your corporate records are up to date, that your governance documents accurately reflect how the business operates, and that there are no loose ends that could give a buyer pause during due diligence. I like to refer to it as reverse due diligence. Ask yourself: are my contracts, financial statements, and regulatory matters current and well-organized? Common issues that surface during due diligence include expired or unsigned contracts, inconsistencies between operating agreements and actual business practices, unresolved disputes, lapsed registrations, and intellectual property that has not been properly assigned to the entity. Each of these issues can delay a closing, reduce the purchase price, or—in the worst case—kill a deal entirely. The time to address them is now, not when a buyer’s counsel sends you a diligence request list. The cleaner your records are, the smoother the sale process will be and the more confidence a buyer will have in the value of what they are purchasing.
Beyond the legal and financial housekeeping, business owners should think about the human element of succession planning. If you have been the face of the business for decades, customers and vendors may have relationships with you personally rather than with the company. A thoughtful transition plan will include introducing your successor to key relationships well in advance of your departure, preserving goodwill and demonstrating that the business can thrive without your day-to-day involvement. This often involves a consulting or advisory arrangement where the departing owner remains available for a defined period after closing to facilitate introductions, transfer institutional knowledge, and provide continuity for clients.
Timing is Everything
You never know when the right opportunity to exit will present itself. Too often, business owners wait until they are ready to walk away before beginning the succession planning process. The reality is, that may be too late. A well-executed succession plan takes years, not months, to implement. Whether you are grooming an internal successor or positioning the business for a third-party sale, starting early gives you the flexibility to make strategic decisions rather than reactive ones. It also allows you to address weaknesses that might reduce value—whether that means diversifying your customer base, investing in systems and processes, or developing a management team that can operate independently.
The bottom line: if you have not yet started thinking about succession planning, the time to begin is now. Engage your legal counsel, financial advisors, and accountant early in the process. These professionals can help you navigate the tax implications, structure the transaction efficiently, and ensure you are protected throughout the transition. Business succession planning is not a single event—it is a process, and the sooner you begin, the better prepared you will be when the time comes to step away.
