Expert: Timmy Chou - 11/23/2009

Question
I am 1 of 3 partners in a service business (medical billing).One of the partners wants to leave and end her professional association with the others. The remaining two do not wish to maintain the corporation together so the business is dissolving. Each partner will be keeping clients on their own. The assets of the company are equipment, software, etc. and the outstanding accounts receivable. One of the partners would like to keep the software and some other items. The other two feel they should be compensated monetarily for the value of what the one will be keeping. So far, we have worked that out and have agreed that after all debts are settled (business loan, leased equipment) the remaining cash balance will be divided. One person is keeping a large account while the other two are each keeping 2-3 smaller accounts.The future revenue is not the same.  How and should this be considered?

Answer
Thank you for your question!

Sorry for the delay, the system just notified me today of your question.

If you have looked at some of my previous answers you may know that I always advise questioners that mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.

I am not an attorney and cannot give you legal advice but can respond from my mediation, management and consulting experience.  I am assuming that your settlement agreements are being crafted "on the fly", and I am also assuming you have not done anything to put you in breach of any written partnership obligation.  Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

It is best to have as much structure created at the outset of starting or building a business rather than in the middle because there are inevitable assumptions and expectations created by each party.  FYI the area of least development in start-up businesses is in break-up or dissolution contingencies, where partners specify what the rules are in case of problems.

Consider doing the following preparatory and proactive steps right away as a good discussion foundation.  Here are my recommendations:

1.  Document a chronological timeline noting the creation of the business, the promises made and your individual contributed work products, asset contributions, the identification of accounts, or any other contribution.  Also document the rise of the conditions leading to the dissolution and record how this plays out.

2.  Review your existing documents.  Review whatever written agreements, operating agreements or other governing documents you have for guidance about rules for disengagement.   

3.  Look at your legal options.  You don't say how much money is involved here but any litigants will incur a large cost to file suit, and you have to count the possible cost to yourself to pay for or defend this.  Remember that nearly 90% of lawsuits settle before trial so the question is usually not IF you will settle, but when and at what cost.  Disputing parties would be better off to wisely choose a cheaper, faster mediated settlement.

4.  Go see a lawyer.  The local Bar Association usually has a referral service that will give you access to an attorney for free.  You may wish to understand the legal landscape.

Once you understand where you are and how you got there you are then in a position to work out a settlement.  

Typically in service businesses the "value" inherent in the business is not necessarily the assets, but the ongoing cash flows from the services.  In these cases I am interested in the dollar value of these cash flows, but I am also interested in the cost to recreate those cash flows as well.  Both numbers are important to valuation.  Therefore if there are large existing cash flows, but re-creation is not difficult, than it can often be the case that some partners may keep the existing accounts, but provide the other partners with funds (usually X$ times two) so that they can go out and create new cash flows.  In other cases the cash flows are split in unequal amounts between partners, but a payment or percentage fee is paid for a determined amount of time to compensate disadvantaged partners.  

Typically a one third partner cannot override the wishes of the other two thirds, as the majority rules in a vote.  Partners may individually wish to do one thing or another, but cannot compel the partnership.  The Partnership can hold a vote and determine what it wants to offer the departing partner.  Partners have a duty to the partnership to not damage it.  Hence, a partner cannot just demand his "piece" out of the middle if it will precariously damage the partnership interests for all.  A prudent buyout plan over time usually makes the most sense.  

These are some ideas.  Feel free to follow up with additional questions.

For your general information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!


Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

   Confidential, no public record
   Limited exchange of documentation, information
   Quick, don't have to wait for a court date
   Arbitrators have expertise in the subject matter and are trained in conflict resolution
   Cheaper than litigation
   Preserves business relationships

Negatives of Arbitration

   It's often a compromise, no 100% winner
   Complex arbitration can be costly
   If not satisfied, may litigate the arbitration procedure
   Poor results with an unskilled arbitrator
   Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

   Neutral mediator can objectively suggest alternatives not considered before
   Parties are directly engaged in negotiating the settlement
   Can be quicker than litigation
   Less costly than litigation
   Preserves business relationships
   85% of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

   may not reach a binding decision
   unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

   a clear winner and loser
   uses a prescribed set of procedures
   more predictable outcomes
   is final

Negatives of Litigation:

   waiting for court dates can do more harm
   usually more expensive than mediation and arbitration
   part of the public record