Recently, firm founder Mark Kimball and senior associate Dennis Kasimov obtained a notable win in a private arbitration on behalf of the majority owner and managing partner of a regional CPA firm in a business partner dispute concerning the future of the firm. The dispute arose because of an ownership transition when the founding partner was seeking to retire and pass the business on to the next generation. Our client, a highly competent and successful CPA, was chosen to be the future majority owner and managing partner. The other buyer was found through a business broker and was not a CPA, but, at the time, expressed interest and passion for the CPA industry. It was intended that he would handle the “business side and operations” of the firm. The buyout was leveraged by a loan from the Small Business Administration.

Almost immediately, issues arose between the new partners and between the non-CPA minority owner and the retiring owner who continued working at the firm to help the transition. Contrary to discussions before the buyout, the new non-CPA owner had insufficient management experience and even less understanding and experience with the CPA industry so, as would be expected, management disagreements proliferated. The non-CPA owner saw his interest in the firm as an investment and did not fully understand the full scope of the fiduciary and ethical duties that a CPA firm is mandated to follow.

The client grew increasingly concerned that the disagreements were affecting client services and sought to resolve the issue by offering a generous buyout package to the non-CPA owner, including a large lump sum payment in excess of the minority owner’s contributed capital, monthly severance payments through the end of the year, and to hold the other owner harmless for the SBA loan debt. This offer was rejected. The non-CPA owner refused to go to mediation to resolve any disputes initially. When the parties finally did go to mediation, the matter was not resolved and our client had no choice but to proceed with arbitration as required by the operating agreement.

Due to the immediacy of the disagreements, the arbitration was set on an expedited schedule. At the outset, the non-CPA owner sought advancement of legal fees from the firm under a provision of the operating agreement, but failed to obtain that relief under the specific language of the contract. The matter then proceeded to discovery and ultimately a three-day arbitration hearing. During the hearing, our client relied on the testimony of numerous employee witnesses while the non-CPA owner did not call any witnesses. He did not even call his expert witness, because he and his expert witness did not agree regarding the fair value appraisal of his ownership interest – an omission that the arbitrator found notable.

Ultimately, MDK Law’s client prevailed at the hearing and was successful in forcing the non-CPA owner to withdraw from the firm due to breach of fiduciary duties and gross negligence. In a continued effort to deny the results of the arbitration hearing and amicably resolve the issues between the partners, the non-CPA owner raised novel issues after the entry of the arbitration award to challenge the findings of the arbitrator. Again, these efforts failed. Our client was awarded the relief sought as well as a majority of attorney fees and legal expenses incurred.

This case underscores the necessity for careful transition planning in a business when it comes time for an owner or manager to retire. At this point, the retiring owners’ goals may be in conflict with those of the individuals who will be taking over, so it is important to find buyers of a business interest that are well suited for the position and understand the industry. Take extra time to do due diligence. At MDK Law, we are experienced in helping you deal with structuring a business ownership transition. Please reach out for a consultation if you are in need of assistance to sell or buy a business interest or are involved in a dispute with a business partner. Further, we consider it a great privilege to represent fellow professionals in their business dealings and legal needs.

If you or your business are engaged in a business or partnership dispute, please do not hesitate to call MDK Law and speak to one of our litigation attorneys. If you would like to speak with Mark D. Kimball, you can reach him via email at [email protected]. If you would like to speak with Dennis R. Kasimov, you can reach him at [email protected].