No one forms a company or business venture planning for it to fail. In the beginning of a business, it is easy for all partners to focus on the positives. But sunshine and rainbows fade, and it is very important for the partnership agreement to take into account a number of scenarios to protect both you and your partner.
Some common situations that should be addressed:
- One partner wants out (or needs out for health or financial reasons);
- One partner passes away;
- One partner wants to change the agreement;
- The partners no longer get along;
- The business, as it becomes established, is more complicated than the agreement—terms should be discussed among partners incrementally as the business grows, and agreements updated accordingly.
Common exit provisions:
- Owner buyout—Based on a formula agreed to at the time of formation, on a neutral appraiser, or on the opinion of some trusted third party;
- Replacement—May be best option (especially for retail or professional business) to keep continuity and allow buyout;
- Terms for payment—May not be lump sum payment. Remaining partners may need time to complete buyout;
- Arbitration—Agreement that a third party arbitrator will become involved to make sure both partners are protected during transition;
- Liquidation—If company has no going concern value, or if significant debt exists, may be the only option.
Tips upon an exit:
- Be sure to have the written exit agreement/strategy signed by all parties; “he said, she said” situations often arise if all terms are not clearly written down.
- If a messy breakup seems imminent, obtain key information about the company that could be withheld by your partner in the heat of emotion. Historical financial records and tax information is often a center of disputes.
- Make sure you have all bank account numbers and computer/server passwords necessary to run the business. Again, you don’t want to be held hostage to the detriment of your business.
- Look at your loan documents—Change in Control provisions are often triggered by a partner leaving, which can trigger a default. Also, if you are the exiting partner, make sure you understand the continued existence of guaranteed debt that may come back to haunt you years after you leave the business.
- Consider how to announce an exit. Employees know more than you think about what is going on. A partnership dispute can often spoil employee morale, to the detriment of the business. Even if the split is amicable, the departure of a founder will impact the confidence of employees. The announcement should be confident and concerted to reassure staff of the strength of the company.
- You should get your own attorney to review the transaction. A corporate attorney has a duty to the corporation (i.e., the partners collectively and not your individual interests).