“An ounce of prevention is worth a pound of cure.”
Benjamin Franklin’s axiom that “an ounce of prevention is worth a pound of cure” is certainly applicable to business continuation and succession plans. When problems arise between or among business owners, key employees, and other investors, provisions in the governing documents of the organization should help prevent unintended or catastrophic consequences to the business due to unresolvable disagreements. This is particularly true in family-owned and closely held businesses where any number of personal or relational issues can interfere and cause disruption of an ongoing business concern.
The Double-Edged Sword of Closely Held Businesses
Although there are many positive attributes of closely held businesses, such as shared values and goals, loyalty, sense of identity, and legacy, there are also many potential negative attributes, including infighting, role confusion, lack of objectivity, nepotism, and inherent conflict relating to business succession. There can be many triggering events in the conduct of a closely held business that may cause disruption or conflict among the owners. Issues relating to equality of contribution in time, effort, or money can create conflict. Questions relating to the future involvement of the owners’ children in the business and future ownership and control of the business can also be problematic for the long-term success of the business. In family-owned businesses, these issues can be very emotional and can disrupt or negatively impact family relationships for years.
Planning to Prevent Business Divorce
There are always many considerations in managing closely held businesses. Of preeminent importance is planning for the continuation of the business once the initial owners are no longer involved. If conflicts arise leading to irreconcilable differences, just as in marriage, a business divorce can be acrimonious and harmful to the overall success and value of the business. Accordingly, issues relating to business succession and early conflict resolution must be addressed quickly and adequately by legal counsel in the governing documents of the business. The objective is not to do away with all conflict. It is to provide a means for the resolution of the conflict with as little impact as possible on the success of the business.
Involve Legal Counsel Early to Safeguard Continuity
Closely held business organizations should plan for the uninterrupted continuation of the business in the event of conflict, and for its survival following the withdrawal or death of the founders. It is important that good legal counsel be involved to address existing or potential conflict issues and plan for how these types of issues will be addressed in a reasonable and workmanlike manner. In the event the threat of potential conflict among the business owners has not been addressed in the governing documents of the business, it is very important that good legal counsel be involved as early as possible to address the internal threat to the business’s long-term survival.
For more information on business divorce, contact us.