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Due Diligence and Business Divorces

Business divorces happen all the time. A business divorce has three things in common with a personal divorce:

  • The divorce can span the spectrum from hostile and acrimonious to cordial and peaceable;
  • The divorce can be caused by simply losing interest or because of charges of misconduct or disloyalty or something similar; and
  • If the divorce ends up in court before a judge, it is very costly for the business

This is the key reason that a plan of dissolution should be agreed to long before anyone begins thinking about a divorce. Retaining an experienced San Diego corporate attorney is essential to ensure that your business has a solid and enforceable owner’s agreement or buy-sell agreement.

If matters have gotten to the point where a divorce is occurring, it is also important to conduct a due diligence investigation before the divorce is finalized. When the due diligence is completed, your trusted San Diego corporate attorney will have drafted a dissolution agreement for everyone to sign. The goal is to make it possible for all parties to sign a dissolution/settlement agreement that contains a mutual release of all claims against the others. A mutual release of all claims is the manner in which the business divorce becomes final and the parties can go their separate ways. To accomplish this, there needs to be a period of due diligence to investigate and come to an agreement on various specific issues, including:

  • Status of reimbursements and other claims for expenses due to the departing owner
  • Association with and signatories to financial accounts
  • Access to computers
  • Termination of use of and access to emails (included here may be the departing owners’ need for copies of emails — that can/should be arranged in advance)
  • Passwords for access to financial and online accounts
  • Ownership of social media accounts
  • Status of business records and any need for completion/supplementation prior to separation
  • Obtaining/providing copies of any needed business records
  • Tax payment issues — if the separating owner has been responsible for paying taxes, due diligence is needed to ensure the status of payment
  • Creditor payment issues – same as above
  • Division of assets and debts — a full accounting of assets and liabilities (including taxes or other obligations to creditors) is needed and should be reflected in any payment made to the separating owner as part of the dissolution agreement
  • Obtaining the valuation reports/opinions
  • Status of and removing the listing of departing owners on insurance, government filings, litigation pleadings, UCC and real estate recording, intellectual property registrations, and similar
  • Status of and assignment of intellectual property creative rights — if any
  • Confidentiality with respect to trade secrets and other confidential data/information
  • And more

As can be seen, these are similar to the types of issues that are explored during the due diligence undertaken as part of a merger and/or acquisition, and this is not surprising. A business divorce can be seen as a type of business sale or purchase in the sense that the former ownership has ceased and, now, the business will go forward under new ownership/management.

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can also help with all the other legal services necessary for a successful business. Mr. Leonard can be reached at (858) 483-9200 or by email. Mr. Leonard proudly serves business owners and residents in San Diego and in the surrounding communities. Like us on Facebook.

You Might Also Like:

Mistakes to Avoid When Running Your Family Business — Lessons from Club de Cuervos

Family Business Charters and Family Councils

Five Ways to Avoid a Nasty Business Divorce

Why Business Valuation Provisions are Important for Your Partnership or Owners Agreement

Buy-Sell Agreements Should Contain a Right of First Refusal

Dissolving a Business?


Schedule a Consultation: 858.483.9200