Business Dissolution Problems

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Business Dissolution Problems

Particular Types of Business Dissolution Problems

Different Business Types Face Unique Issues

Certain types of businesses present special problems when there is serious disagreement among the owners requiring business dissolution.  Medical practices, franchises, liquor establishments, and other businesses face different issues when prompted with the decision to dissolve a Michigan business.

Medical Practices

Medical practices, for example, may have valuable contracts with hospitals to provide services with certain departments. This raises serious questions as to who among the physicians will have a right to inherit those contracts. Medical practices that have their own patient base instead of contracts with hospitals can be difficult to evaluate because the relationships between the patients and doctors are direct and personal. The patient doesn’t have loyalty to the practice, but rather to his or her physician who just happens to be associated in that medical practice. Thus, each physician is going to take the value associated with his or her patients leaving very little residual value in the practice itself.

Franchises

Franchises, such as a McDonald’s restaurant, are the lifeblood of the company that owns it. The person who walks out with the franchise has walked out with the business. Thus, when a franchise business is going to be dissolved, proper evaluation of the franchise has to be accomplished by accountants skilled in business valuations and able to establish a true and fair market value of the franchise right itself, apart from the tangible assets of the business.

Liquor Establishments

Sometimes liquor establishments are located in places where liquor licenses are not freely obtainable. Moreover, the liquor license approval may be tied to an individual such that it can’t be transferred to another person without consent of the liquor control commission. Once again, like the franchise, dissolution of the business requires careful evaluation of the liquor license.

Businesses that Rely on Interpersonal Relationships

Businesses that rely on personal relationships between certain people in the company and a handful of key customers can be very difficult to evaluate because one or two key individuals in the business will likely be able to keep those relationships and carry them forward into a new venture after the business has been dissolved. Other owners attempting to buy the goodwill of the business without taking this into account may find that they have paid for essentially nothing. On the other hand, the owners who have these relationships will argue that they own those relationships individually and the business cannot undo the fact that the individual will have that strong relationship with the customer no matter what happens to the business. In other words, those relationships were never assets of the business in the first place.

How to Avoid These Special Valuation Problems

If ever there was truth to the phrase that an ounce of prevention is worth a pound of cure, it is in the valuation of businesses. All of the problems discussed in the examples above could be avoided if the owners had decided before problems arose how they were going to value the business upon dissolution. The options are virtually limitless, and the answer must be tailored to the individual business.

A common method used to equalize for all of these factors is to work with the firm’s accountant to figure out what the business is worth after fair compensation to the owners for their services provided has been taken into account. The crucial outcome is that the owners reach agreement on the valuations while they are still getting along. They may decide to adjust the value in their agreement annually, or agree upon a formula that will be objective and not subject to manipulation if a dissolution has to take place.

 

Call Seikaly, Stewart & Bennett for a No-Obligation Consultation

If you would like additional information on business dissolution laws, please contact the Michigan business dispute attorneys at Seikaly and Stewart for a no-obligation phone call or office appointment. Call 866-671-8115 or fill out our contact form to arrange your consultation.

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