Breaking up a company but keeping clientele can be hard to do


June 10, 1991|By Ellen James Martin

Business divorce is on the upswing due to the economy. And lawyers who handle business breakups say the similarities to domestic divorce are many.

"The analogies to actual divorce are incredible. People often take things very personally, anger tends to flash up, and communication between the parties tends to go," says Jerome Miraglia, a corporate law specialist with Miles & Stockbridge, the Baltimore law firm.

Still, Mr. Miraglia says parties to a business divorce should take note of one important fact: Although the financial implications of a marital breakup are usually finite, they can be unlimited in the case of a business divorce.

"You're not just dividing up the company. You're also dividing up the earning potential of the company and its future revenues," Mr. Miraglia says.

The key to a well-resolved business divorce is to preserve as many of the assets of an business as possible and to avoid liquidation. But to do that, the parties often have to overcome a strong tendency to vindictiveness.

"The key is to be as dispassionate as possible," Mr. Miraglia asserts. But it's not always easy to be dispassionate, given the way many business divorces play out.

These days, with many companies facing declining revenues and profits, business divorce often sparks the removal of a senior executive with an equity stake in the enterprise. The idea is to cut costs by cutting a high-cost salary -- but such financial considerations may be lost on the executive, who is likely to take it personally, Mr. Miraglia says.

Even if the person being pushed out was performing on a subpar basis, it's important for those still running the company to keep a positive attitude toward the executive. Recall the executive's accomplishments on behalf of the firm rather than his short-comings.

Attorneys such as Mr. Miraglia, who are involved in numerous business breakups, offer these pointers:

* Try first to reach agreement on the breakup through the company's attorney.

"It could save you a lot of cost and aggravation if the existing counsel for the business can come up with a quick, easy solution," Mr. Miraglia says.

Suppose, for instance, that two partners in a home remodeling company decide that the third partner, Joe, must be forced out due to incompetence. They arrange a meeting among the partners and the corporate counsel. The counsel suggests that Joe agree to take a cash settlement in exchange for his stock. After reviewing the draft agreement with his own lawyer, Joe signs the document. That would be an ideal solution for all parties involved, unfortunately, it is rare for an agreement to come so easily, he says.

* Next, try to reach a separation agreement through someone who is close to the business -- but who can be impartial.

Someone who truly knows the company, yet is relatively impartial can attempt to reach either a binding or non-binding solution to the dispute. Often a member of the board of directors can fill the role of mediator or arbiter.

* Try to avoid dividing the company's operations.

"When you divide a business in half, rarely do you have two stronger businesses. Usually, you have two weaker businesses," Mr. Miraglia says. Suppose an accounting firm's office equipment was divided between two warring factions. The one who got the chairs would obviously also need the desks and vice versa. Most companies need the synergy of their main parts to preserve the value of the whole, Mr. Miraglia says.

Rather than dividing desks, customers or territory, it's usually better for one party to retain the business, buying off the other's share of the stock in exchange for cash, he advises.

* Be sure to put specific "non-compete" and "non-solicitation" clauses in a separation agreement.

Often separation agreements contain only broadly-worded clauses related to the ability of a former owner to compete with his old business or to solicit its customers. Such clauses are an invitation to expensive litigation in the post-separation period, Mr. Miraglia says. "People wind up fighting about what they can and cannot do in the aftermath."

* Don't show your dirty linen to the public, especially to your clients. If there's a chance that negotiations over the breakup of the company could result in shouting, for instance, you won't want clients in the waiting room overhearing the conflict. Clients who are led to believe that a firm is unstable or faces an uncertain future may cease to be clients, he cautions. "If you get into a mud-slinging contest and your clients find out," Mr. Miraglia says, "everyone is going to lose."

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