In Diamond v. Pappathanasi, 78 Mass. App. Ct. 77 (2010), the Massachusetts Appeals Court began its decision with the following language:
This appeal involves a distressingly familiar scenario: the development of a successful family business enterprise by one generation, followed by a bitter intrafamily battle over ownership and control in the next generation.
These difficult issues arise not only in family businesses but in any business operated by more than one person; and while issues frequently arise on the death of an owner, they also frequently arise during the business’ first generation. Further, disputes arise not only in successful businesses but also in troubled businesses. In the troubled business, frequently the owners have incurred personal debt, yet the business possesses hard assets that, if liquidated, may satisfy some of the debt. At the same time, the struggling business is providing modest income for family employees. The coexistence of one owner’s debt and another’s income creates conflict.
While dispute is difficult to avoid, carefully drafting a balanced exit strategy can minimize the adverse impact to all involved.
The time to plan is early, before conflict arises. Once conflict arises, agreement is virtually impossible; and time-consuming, expensive, and stressful litigation is likely. Beyond this, the outcome of litigation may be financially disappointing.
While planning for separation is essential, it is often difficult to address. Early in a business, the principals expect harmony and see no need to address a situation that may not and hopefully will not come to pass. Further, startup businesses are frequently on a tight budget.
An exit strategy is much like insurance. Insurance is purchased to address circumstances that are not desired or expected yet are likely to be costly if they should come to pass. An exit strategy should be approached similarly. Owners will invest time and money in their business. Without an exit strategy, much is at risk.
Copyright Richard M Russell, Falmouth, Massachusetts