Breaking up a consulting firm is hard to do. For starters, there’s often no formal agreement governing the divvying of everything from client lists to capital accounts. That’s because the death of a firm is usually the last thing partners think about when coming together to hang a shingle.
But a haphazard exit strategy can lead to squabbles over money, the office computers or even future tax bills. And these fights have a way of dragging on and getting public fast as the partners seek to protect their reputations.
The Democratic side of the industry has witnessed its share. There’s been the public demise of MSHC Partners, which broke up in 2010. Jim Crounse went through another dissolution in 2013 when the Mack-Crounse Group split up.
One of the most well known examples came in 1995 with the break up of the media firm Doak, Shrum and Associates. That’s when Robert Shrum and Tad Devine, a partner, used their their lawyers to tell David Doak “they wanted out.”
Republicans, meanwhile, have seen the near internal combustion of Rex Elsass’ The Strategy Group for Media, after an ugly legal battle with the firm’s then president Nick Everhart. There are also quieter uncouplings, like Chris Perkins’ solo exit from research firm Wilson Perkins Allen (WPA). His name is still on the firm’s masthead, but Perkins isn’t a part of it.
Now, as firms increasingly come together around technology platforms or apps — in many cases founded by relatively inexperienced, young operatives — partnership agreements are getting more complex. Or in some cases, they don’t exist at all.
“I do think that there are a lot of people out there in the business, opening up their laptops at a Starbucks thinking they can be consultants,” said Liz Chadderdon, a longtime Democratic mail consultant. “This is a real business. It’s not your father’s political consulting industry.”
But this isn't a problem confined to the up-and-coming generation of practitioners. Some major shops that have operated for years have nothing close to a partnership agreement on paper, which attorneys characterize as the equivalent of a last will and testament.
Chadderdon, who has operated a self-named firm for years, is launching a new shop with partner Joe Lestingi.
“I resisted partnerships for nine years because I didn’t want to have to run anything by anybody else,” she said. “Joe was just the right person. He was somebody I want to have my name next to his on a logo.”
Chadderdon said they discussed with a lawyer how to formulate their partnership agreement. “Sometimes lawyers get paid to make things harder, but it’s their job to think of all those crazy scenarios, because you never know.
If I died tomorrow, we had to talk about what happens to my share of the company because I have no direct descendants,” she said.
Chadderdon said they never considered entering into the deal without a partnership agreement in place. “I was at his wedding and I would consider us friends, but it didn’t occur to us to enter into a partnership if we didn’t have” a detailed legal agreement.
She added: “It’s frankly foolish to enter into a business arrangement with no formal contract. I think people are, unfortunately, naive around what it means to be in a business partnership. They think, ‘oh, we can just do this with a spit and a handshake.’ I think that is a colossal mistake they end up regretting. If a firm broke up without those contractual and legal boundaries, I don’t know what would happen.”
Usually the first thing that happens is feelings get hurt. In fact, many consultants liken firms breaking up to getting a divorce. Even with the most amicable dissolutions there are usually bruised egos. Subsequently, decisions are made through an emotional, rather than a business lens.
Even the digital startups, with their focus on tech over politics, aren’t immune from this. Joshua Baer, executive director of the Capital Factory, an Austin, Texas-based small business incubator where Justin Gargiulo’s firm VoterTrove was launched, recently tweeted his advice to entrepreneurs breaking up their startups.
He advised partners to treat each other the way they would like to be treated if the tables were turned. And to keep in mind that business communities can be small. “Assume the best and remember that it's a small world and Austin is a small town and you're likely to see each other again,” he said in a Jan. 4 tweet that could just as easily apply to D.C.
Some young poli-tech entrepreneurs said they were aware of the pitfalls of operating a business without a partnership agreement. Alex Law, a former New Jersey congressional candidate-turned-consulant, said he had one in place before launching Partic.
“When we [Law and partner Sean Adler] originally started the company, we had a long conversation about what we were hoping to achieve with Partic and how we envisioned getting there. That conversation turned into our partnership agreement,” Law said. “We later brought on the incredibly talented Adam Miller. We consider him a partner as well, although he owns less of the company than Sean [Adler] and I.”
Law noted that the company is structured as an LLC, but if they decide to pursue VC money, they’ll have to reorganize as a corporation. “That is generally required by the industry,” he said.
Kendall Tucker went a different route. When she launched Polis, another app-based poli-tech startup, she did it as a C corporation owned by her and her investors. The company’s employees have options, but not equity in the company. “We chose to be a c-corp because we expected to bring on investors and give our employees options. It seemed like the best vehicle to accelerate growth,” she said.
Whatever form a company takes in life, its demise usually looks the same, according to Christina Sirois, an attorney with DB Capitol Strategies. “You have business registrations that need to be terminated and shut down. We’ve had issues where a firm didn’t file final employment tax forms, which terminates your business account. They ended up receiving a notice after 10 years. You don’t want to end up getting a $40,000 tax bill after 10 years.”
When it comes to partners dissolving a firm, Sirois noted that pre-existing agreements, drafted by lawyers, can help with the biggest complication: money.
“How the money gets distributed, that needs to be carefully considered in an agreement,” she said. “It might not be pretty, and you have to plan for that. Are you going to sell the assets? What if you end up completely upside down, is that going to be handled in proportion to your ownership [stake]?”
A firm doesn’t have to be completely dissolving for there to be complications, she noted. “Is a partner allowed to go and open up the exact same business? Is a partner allowed to walk away with a client list?” Moreover, what does a referral arrangement look like?
Those kinds of questions took Chadderdon and Lestingi 11 months to sort out. She likened their partnership deal to a prenuptial agreement.
“It isn’t romantic,” she said. “But it sure is practical.”