How to Escape Your Business Partnership

Chris:

I want to get out of my partnership. We never created a Partnership Agreement so I’m not sure how to go about getting out. I want to get what my half of the business is worth but my partner refuses to talk about it. What can I do to get out and get what I am owed?

What You Are Owed

This is one of the most common questions I am asked: How do I get out of my partnership? And, it’s the biggest reason I am always ranting about having a Partnership Agreement. Without a Partnership Agreement, your options are very limited. You accept anything your partner is willing to give you, or you can dissolve the business. That’s about it for options. Sure, you can try to sell your stake in the business, but few people will be willing to step into a partnership with a hostile partner. If the ideal person is willing to buy in at a price you’ll accept, and if your partner will admit that person as partner, this option might work. The best option is for your partner to make a generous offer to buy you out. That’s rare.

Dissolving the partnership isn’t usually a good option either. If the business is profitable and your partner wants to continue without you, it will be pretty tough to dissolve though a court could force that if the partners cannot agree. I’m assuming that you [wisely] don’t want to have the court or lawyers involved. Forcing a dissolution is probably not an option.

You can assume your partner won’t make you a dream offer on a buyout. She doesn’t have to. You can expect endless conversations about the current value of the business. At least endless until tempers flare and all “conversations” cease.  In reality, you are not legally entitled to anything. You are not even entitled to getting your initial investment back. Business is risk and, sometimes, reward. You can spend a lot to start a business without any guarantee of success. In short, if you want out of a business partnership, you are not owed anything. You might consider keeping your share and receiving periodic distributions of profit —if the business is profitable.

So You’re Stuck?

No. If you play nice with your partner or get a third party involved (recommended), the conversations will continue and a compromise found. Just remember, entering and exiting a partnership should not be taken lightly. When a partner wants out, there’s usually tension in the partnership. And, logically, when there is tension between people, both will negotiate from a firmer position than if there was no tension. Right?

Read on for how a Partnership Agreement can easily solve the problem.

How the Partnership Agreement Solves the Problem

In a meeting recently, two partners asked me how they might determine a value for their company that was fair. Based on the nature of their business, I offered a formula that I said would be pretty close to a true valuation and fair for each partner. They said, “wait a second while we calculate that.” They used the formula I gave them and quickly arrived at a number. They we both surprised that using my formula (different depending on the business), they arrived at a value that was within 2% of the number provided by a $20,000 appraisal! Frankly, I always tell partners that they know what their business is worth. They do.

When you create a Partnership Agreement, include a formula for arriving at the value. It can be as simple as 3.2 times last year’s net profit. There you have it. You’ll save thousands in fees if a partner ever wants out. Once codified, that’s the value. Fight over. Of course, you’ll want to be conservative in the formula because it’s a bad idea to incentivize a partner to exit during a tough time. If you want to induce your partner to accept a buyout, you can always offer more. At least get the method for determining the value in writing. 

 What If There Is No Partnership Agreement?

When someone wants to leave a partnership where there is no agreement about how that is to be handled, the talks can get pretty nasty. I recommend getting a mediator. Don’t wait until the tension is so high that partners are no longer talking. When the tension is very high, it will take the mediator a little time to just get people talking civilly. 

I help business partners work out fair buyouts. There is much more involved than just reaching agreement on price. There needs to be a release of future liability and the partner who is leaving needs to agree to make no further (future) claims against the business. There are many other things to consider and I won’t go into them now. An experienced mediator will take care of those details for you. 

In summary, the best way to escape a business partnership is to plan for it. Bake that exit clause into your Partnership Agreement and you’ll protect the partners and the business.

“If you play nice with your partner or get a third party involved (recommended), the conversations will continue and a compromise found. Just remember, entering and exiting a partnership should not be taken lightly.”

Chris Reich, Business Partnership Mediator