Q & A with Tony DeChello – Corporate Divorce

Q – Let’s take just a minute to talk about your concept of corporate divorce. Does corporate divorce usually entail some kind of acrimony or bad feelings, or can it just be partners who just want to part ways?

A – In general, there’s usually an accumulation of bad blood or discontent that has accumulated over a period of time, and in most cases, it’s the only the fact that they are making money that kind of glosses over the problem. It’s usually when there’s a dip in the economy, or a business is suffering some financial troubles, where at that point one party will say to the other “I’ve had it, and I want out.” It’s rare where it’s somebody who just says they want out, and in that case, usually they’re on speaking terms and are able to say “I want to sell. Do you want to buy me, or do you want me to find a buyer to come in and buy my interest?”

Typically, the corporate divorce situation is where there have been longstanding issues that have not been dealt with, and they kind of come to a head. It’s not very pleasant. It usually results in either somebody being fired, or somebody being isolated or their life is made miserable within the business, and people say “I’m not agreeable to that,” and they go from there.

When it comes to a situation like corporate divorce, I think it’s imperative that the client have a lawyer that is well-versed not only in business law, whether it be corporate law, partnership law, limited liability law, but also have experience with employment law, and have experience with accounting, since in many instances, there are things done in the business that are not necessarily in accordance with generally-accepted accounting principles. It takes someone who can read the financial statements, who can speak to a business valuation expert and understand what makes a business more valuable, and what can be done to make it less valuable.

I had a situation where the business evaluation expert came in and said that the business was worth $1m, but it had $750k of cash on its balance sheet. Now, if you didn’t know how to read a balance sheet, and appreciate that it had $750k in cash, you wouldn’t be able to argue with the evaluation expert to say “I think your methodology is flawed.” I’d buy a going concern any day of the week if I’m paying $1 and getting a business with $0.75 in it already.

Q – Are you telling me that you sometimes argue with experts?

A – All the time.

Q – So think about the last call you received.  Did they say “I’m getting squeezed out of my company”? Did they say “I’ve had it, I want out.” What was the first thing they said to you?

A – What they said was “I’m having a problem with my brother, and the problem is that he wants to kill the business and I’m the only guarantor on the business loan. I need to find a way to deal with him, because if he has his way, he’s going to run the business into the ground, and he’s going to do it as a way of trying to force me to buy him out at a value that’s more than I think it’s worth.”

Q – How about the client before that?

A – It was a similar situation where two partners purchased their business from their employer who retired. One partner was about 10 years older, and was an alcoholic who was engaging in a lifestyle that was detrimental to the business, and the younger partner wanted to buy the older partner out. They went to their business accountant who put a value on the business, and when the younger partner went to the bank, the banker said “I can’t lend you that money to buy your partner out, because the business doesn’t support the value.” No one would pay that much for the business. He came to me saying “what do I do?”

What I did was speak to the accountant, and realized that the accountant had included something as an asset to the business when it was really a liability, and after some heated discussions with the accountant, got the 2 partners to agree to go to a valuation expert who did nothing but evaluate businesses in their industry. What came back with a number that was substantially less, and because of that, we were able to structure a buyout without any big acrimony. At that point, the accountant couldn’t argue with the expert who values these types of businesses. Bottom line, we got the buyout done.

Q – With enough experience, you’ve seen enough of these things that they must fall into a sort of pattern. Or is each situation really unique?

A – Each one is unique from the standpoint that you’re always dealing with personalities, and past history issues. What’s common in them is that it’s always a function of valuation, what’s it worth, and how is it going to get paid? There are times when it results in litigation. In my view, when it results in litigation, it’s a complete failure on the part of the parties as well as the professionals involved, because in my view, that makes the whole transaction more emotional, and it makes it more expensive.

Q – And it’s also a win-lose proposition at that point.

A – Not only that, but it’s also damaging for the business because now there are energies focused on the litigation, instead of running the business, and there are negative emotions that result in more harm than good. If you’re focused on the litigation, you can’t keep your eye on the business, and then the business suffers. Let’s face it, many businesses have employees, and if the employees are disillusioned and feel threatened, they’re going to jump ship. As a result, now you lose important employees, and you’ve really damaged the business, so those are factors that have to be considered. In general, across the board, there are always issues of valuation, and methods of payment, and it is incumbent upon the lawyers, accountants, and financial advisors to structure something that works for both parties, with the hope that the business survives and thrives, since in many cases, that’s the source of repayment.