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Thought Leaders: Dissolution — The Inferior Default Exit Strategy

By Lee J. Morehead, Esq. - Otis and Bedingfield, LLC — 

Dissolution of a business or company occurs either voluntarily or judicially.

In the case of voluntary Dissolution, all owners must agree either to dissolve the entity or identify a triggering event that will cause Dissolution. To accomplish judicial Dissolution, the owner(s) seeking Dissolution must prove that it is not reasonably practicable to continue the business. Judicial Dissolutions are treated like any other lawsuit, incurring cost in both time and legal expenses associated with pleadings, discovery, and trial.

However, obtaining Dissolution is just the first step in completing the process, each of which has the potential to be hotly contested.  Examples of the steps and potential disputes are:

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  • Notice to customers and creditors is made. Disputes can arise about who receives the notice and what the notice should say.
  • Assets are gathered and liquidated to the extent necessary to pay claims and liabilities. Disputes can arise about the amounts owed and each owner’s share.
  • Remaining assets are distributed to the owners, either in-kind or by liquidation. Disputes can arise about value and each owner’s share.

There can also be disputes about who performs each step and how much to compensate the person tasked with completing each step.

Considering all this, Dissolution can be an inferior exit strategy, but it is what the law provides, absent an owner-agreed-upon exit strategy.

The best time to reach agreement on an exit strategy is during the business’ formation. Owners may agree later to an exit strategy, but that delay risks that an agreement cannot be reached, which will result in Dissolution.

During business formation, there is the thrill of a new business model or perhaps new business partners, and the delight of building a business or making an existing business better. This excitement can provide momentum to reach agreement on an exit strategy. Although exit strategy formation could dampen the mood, it will serve to identify and discuss potential issues before they arise. Issues could include: an owner wanting to leave; an owner’s death; an owner’s divorce; an owner becoming disabled; or an owner not meeting expectations. The absolute best time to agree on exit strategy is before there is an issue because otherwise, Dissolution may be the default. 

In summary, Dissolution is rarely the best exit strategy for the many reasons listed. Not to mention, for most businesses, the whole is more valuable than the sum of its parts, and Dissolution can diminish that value.

If you are considering a new business venture or are currently engaged in a business for which there is no exit plan, it would be advisable to discuss it with an experienced Business attorney, to avoid default Dissolution by crafting an agreed-upon exit strategy.