No one enters a partnership thinking about how the breakup will unfold, but my experience has been that smart business owners do just that before the partnership fails. I’ve been involved in many partnership buyouts, and I’ve seen some that rival divorces in terms of how emotional and difficult they become.
Here are my recommendations for tough conversations while things are going well.
First, I recommend that partners have a solid partnership agreement in place before entering into business together. Not just the ownership interest, but also the authority and responsibility of each partner, as well as the decision-making process. A Buy/Sell agreement makes provisions for one of the partners needing or wanting to leave the business or for the death of a partner, and how the remaining owner buys out the heirs. A comprehensive legal agreement provides protection for both the partners and the business
I also strongly recommend having a business valuation done every couple of years to make sure both parties understand the company’s value in the current market. If you’re thinking about breaking up, you don’t want any last-minute surprises about what the company is worth. If you have had regular updates, you’re less likely to have disputes about its fair value during a stressful split.
One of the biggest challenges to a partner buyout is the non-compete agreement. If the partner who leaves is young enough to keep working and wants to stay in the industry, what are the terms of the agreement? In a smaller market, there may not be many opportunities to make a living that don’t involve competing with one’s former company.
Disputes also arise from different skill sets, working styles, and priorities. Agreeing on who contributes what to the company can make a fair split difficult to determine. A third party can help manage the negotiating process, enabling both partners to envision what a win-win outcome would look like. What if both partners want to keep the business? How do you decide which one stays and which one goes?
The age difference between partners can play a large role in how the partnership dissolves. One partner might be ready for retirement while the other still has many productive years ahead. If the younger partner is just a few years from retirement himself, does he really want to go through a buyout only to sell the business again in three years? These are all challenging and highly personal decisions that have to be considered.
A partnership buyout agreement includes a valuation of the business as a whole and each partner’s share. The agreement will outline the terms and conditions of the sale, including limiting who can buy the departing partner’s share (to remaining partners or pre-approved parties, for example.) In addition to addressing these issues, a business broker can help the remaining partner connect with funding sources and offer guidance on streamlining the financing process.
I’ve made a short video about what you should consider before entering into a partnership, whether it’s with your spouse, your best friend, or a strategic investor. View it here and let me know what you wish you’d known earlier in the comments!
