From a Litigator's Desk: Keep Your Business Laundry In-house

Tuesday, 12 February 2019 18:02 Written by  Thomas P. Donnelly

Business partnerships are like marriages; sometimes they work great from the start and before you know it you are celebrating a 25 year anniversary with a big party with all of your clients and customers in attendance.  And sometimes; not so much.  For reasons unique to business relationships and the personalities involved, business partners sometimes find they can no longer function together, no longer share the same vision, and can no longer tolerate sharing the responsibilities or benefits of common ownership.  We refer to the painful and expensive process of separation as “business divorce”.    

As in any divorce, emotions run high. The natural instinct is to assess blame and recruit those close to the business to one “side” or the other.  Such recruiting efforts implicate disclosure of sensitive, often damaging information with the idea that inflicting pain will induce a desired course of conduct.  Rarely is such an ill-conceived plan rewarded with success.

The reality is that preservation of the business as an asset should be the primary concern.   Often that means preserving the opportunity for the business venture to continue operations without interruption, modification or additional added pressures attendant to disharmony.   Whether the business can be divided according to an acceptable plan among the shareholders, sold as a going concern, or liquidated in an orderly fashion, continued successful operations are essential to return on the shareholders’ investment. 

Successful operations are a function of several factors.  First and foremost, management, employees, contractors and staff must be confident in the direction of the entity.  Public disclosure of disputes among ownership breeds workforce instability, discontent, mass departure and potential competition on the part of key employees with the capacity to do so.   

Customer relationships must also be protected.  Instability will most certainly cause a client to search for an alternative provider of the same product or service.  A client will not risk their own business by not addressing the potential impacts of instability in yours. 

The bank can become concerned as well.  Lending relationships are complicated.  Often businesses obtain term loans or lines of credit which must be “rested” (reduced to zero) from time to time.  A borrower’s options upon maturity can be limited and, notwithstanding a long and happy banking relationship, the bank may not be required to extend credit on the same terms and conditions.  The bank may even take the position, under certain circumstances and certain loan agreements that the bank is insecure as a result of dissention thus forcing very difficult financial decisions.          

Finally, in all likelihood, public disclosure of internal disputes results in the parties becoming entrenched in their respective positions such that a future together is impossible.  Even a sale under such circumstances is likely to net less than market as a buyer is quick to assert pressure on one shareholder or the other in an effort to negotiate the best deal.     

Really no good can come of a public airing or an internal dispute.  Just like a married couple should not publicize their grievances on Facebook, business owners should take care to keep their disputes in house while seeking resolution through any number of mechanisms – at least until it becomes apparent that such resolution is not possible.  Even then, the minimum amount of information necessary to effectuate a course of conduct should be disclosed in the least applicable public way.    

Last modified on Thursday, 14 February 2019 20:35
Thomas P. Donnelly

Thomas P. Donnelly

Tom’s practice focuses on commercial litigation and transactions. In litigation, Tom represents both Plaintiffs and Defendants. Throughout his career, he has undertaken the representation of both individual and corporate clients in subject matters concerning fraud, contracts, employment agreements, breach of fiduciary duty, securities violations, real estate and insurer bad faith. Tom’s clients include individuals and businesses local to the Philadelphia area, as well as national corporations.

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