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Wake-up call – What to do when a business relationship turns sour

04 April 2012

As Gordon Ramsay's high-profile legal wrangle with his father-in-law showed, the break up of a business can be every bit as painful as a divorce. Barney Leaf explains your rights when a business relationship turns sour

THE PROBLEM
You and your business partner's relationship has become a tempestuous one. You are pulling too much weight and many issues rankle. You now want to end the business relationship but would still like to run a similar operation.

THE LAW
The entrepreneurs behind hotels and restaurants are the same as entrepreneurs in other sectors - few are prepared for the day when they no longer want to work with their business partner. The damage from a parting of the ways can be limited by having a shareholders' agreement in place - but often people entering into business can't imagine that situation arising and forgo any agreement.

The break-up of a business can be every bit as painful as the messiest divorce. If this is to be avoided, lawyers should advise you to keep open, honest and amicable communication with your business partner.

Determining the value of the business will be central to finding a way out. If one of you wants to buy your partner out, you may argue that the value of the company is lower than the price suggested, and vice-versa.

The issue featured in Gordon Ramsay's long-running legal wrangle with his father-in-law and business partner of 12 years, Chris Hutcheson, which was recently settled. Hutcheson sold his shares as part of the settlement - representing 30% of the company - for £2m, which was considered to be considerably less than they were worth.

If a settlement cannot be agreed, the dispute will often go to court, which will suggest that either yourself or your partner buys the other's shares. Usually an accountant is appointed to value the shares. The main concern will be to protect the employees and preserve the company.

Part of any shareholders' agreement would include a restrictive covenant to stop the leaving partner from setting up a similar business in direct competition. These restrictions can involve the leaver not taking employees, operating in a location that is very near to the original business or having a similar name or theme.

Shareholders' agreements can be considered to be prenuptial agreements for businesses - rules to assist in the event of a later dispute/breakdown in the relationship. An early understanding of how you are all to deal with the breakdown, will not only ensure it is done smoothly, but also protect the company from any bad publicity it may receive.

EXPERT ADVICE
Clearly, anyone setting up a restaurant or hotel business should ensure they have a shareholders' agreement. Planning for your eventual exit from the business is a sensible thing to do, and the best way of doing this is to have the appropriate agreement in place.

CHECK LIST

â- Take legal advice and listen to it - ask your advisers how many disputes they have dealt with and appreciate their experience.
â- Be realistic in what your company is worth - it is normal for the proposed buyer to place a lower value on the shares and the seller to place a higher one. Agree a fair figure and recognise that there is a value in bringing the dispute to an early conclusion.
â- Get a clear understanding in what you want to achieve. Do you want to buy your partner's shares or sell your shares and leave the business?

BEWARE!
Because you invest so much personal time and effort into setting up a business, it's very stressful to find yourself in a dispute needing to bring an end to your current relationship. It is impossible to completely remove your emotions from the situation, but the longer the situation continues the more damage it will do to the business. Remember, there are often no winners in a shareholders' dispute - it's about reducing the degree of the loss.

CONTACT
Barney Leaf is a partner at Laytons Solicitors, Manchesterbarney.leaf@laytons.com

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