Texas Business Dispute Blog

The successful business owner needs to be able to multi-task, including in the area of succession planning. As noted in the previous post, business owners need to develop and then implement two different succession plans, one for crisis management that applies in the event of an emergency, and a second one that transitions the company’s management and its ownership to new hands. This second post focuses on management succession planning, the final post in this series will review the steps involved in transitioning to new ownership.

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The health-minded business owner who diets, exercises and receives good medical care, may receive a robust physical report suggesting he or she will live forever.  Counting on immortality as a succession plan, however, is a bad bet.  The business owner concerned about the future will want to prepare both a long-range plan and an emergency plan.

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Unlike public company stock, which actively trades electronically on national exchanges at published prices, ownership interests in private companies, and minority interests in particular, are often not readily marketable.  As a result, determining the value of an ownership stake in a private business can be a thorny problem.  Business owners and investors who want to determine the value of their ownership interest typically need to retain an independent business valuation expert to conduct a valuation of the company from which they can then calculate the value of the ownership interest at issue. 

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Conventional wisdom is not always so wise.  In the case of divorce, conventional wisdom holds that the divorcing couple must divide all of their assets at the time of divorce.  When the couple owns a business together, however, splitting up their business in the divorce proceeding often leads to intense disputes over the value of the business, the  management of the company and the handling of key employees.  Therefore, one approach the divorcing couple may want to consider to avoid or lessen conflicts between them is to agree to remain co-owners of the business for some period of time after their divorce is final.  Spouses who remain business partners after divorce do need to be aware of another possible foe – the IRS.

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Ensuring that Trade Secrets Stay Secret

One of the NFL’s most legendary football coaches, Vince Lombardi, is known for fiery speeches extolling his players that “Winning isn’t everything, it’s the only thing.”  Yet, when triumph on the battlefield is so costly it actually destroys the “winner,” it is known as a “Pyrrhic victory,” named in honor of Greek King Pyrrhus, who lost most of his army in two “successful” battles with the Romans.

This prospect of a Pyrrhic victory – a success that rings hollow – is something that business owners in Texas faced until recently when they filed lawsuits to protect their company’s trade secrets from misuse by former employees and competitors.

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Part 1 of this series focused on how private company owners can make their businesses attractive to private equity (PE) investors like those on the hit TV show “Shark Tank.” The discussion picks up after the PE firm has made its investment and the Post considers what steps private company owners can take to get the most out of their business relationship with the PE investor.

As a starting point, it is critical for the business owner to appreciate that PE firms are not lenders, and that a PE investment is not similar to a loan.

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For years, use of the term shark in a business context referred to unsavory characters such as shady lenders, sketchy lawyers and unscrupulous business people.  More recently, the success of the hit reality TV show “Shark Tank,” has given sharks a Hollywood make-over, and a more positive image.  The Shark Tank show features small business owners as contestants who present their needs for capital to a panel of rich investors (the sharks), including Dallas Mavericks owner Mark Cuban.
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During a marital divorce, a couple can work cooperatively to divide the assets in their marital estate, including the interests they own in private businesses.  Things become much more challenging in divorce proceedings, however, when one spouse seeks to retain control of marital assets by continuing to control interests that are held by the couple in family limited partnerships, LLC’s, or other private companies.  In this Blog Post, we focus on various exit strategies that a spouse who is a Limited Partner or other minority member may use in a divorce action to secure control over their share of the assets in the marital estate. 

Defining the Family Limited Partnership (FLP)

An FLP is simply a limited partnership formed by the members of a family.  Families form FLP’s for many reasons, including to achieve tax savings in an estate plan, to protect assets from creditors, to help manage family assets, and to simplify annual gifting.

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In the National Football League, quarterbacks may receive too much credit when their team wins and too much blame when they lose. It is easier celebrate or criticize the person we consider the face of the franchise.   Perhaps this tendency comes from our experience in business world where the success or failure of a private company often traces to the leadership of its majority owners.

Because the success of a private company is so closely linked to the actions of  the majority owners, minority investors need to be closely attuned to signs of trouble. Just as importantly, minority investors should also have a plan in place if it becomes clear that the majority owners of the business are either irretrievably corrupt or hopelessly inept.

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It feels like a sharp punch to the stomach – a physical reaction to the sudden realization that a longtime business partner’s actions have put the business at risk. This is not a disagreement over differing approaches to business issues. It is a full-blown crisis threatening the company’s continued existence. In these situations, the best option is to secure a prompt business divorce that removes the dysfunctional partner from the company.  But, is that possible, and it not, do other options exist to address the disastrous partner situation?

This Post is the first in a two-part series that considers how to respond effectively to, and ultimately secure a business divorce from, a highly dysfunctional business partner.

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Earn-out provisions in purchase contracts are “sweeteners” than can add significant value to the purchase price in the sale of private companies and these terms are increasingly being used in purchase contracts.  This Post explains why the use of earn-out provisions is on the rise in purchase contracts, but it also signals a warning.  As a Texas Supreme Court decision last year made clear, if earn-out provisions included in purchase contracts do not address all key issues and are not drafted with care, their use may result in serious legal problems.

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