Business Partnership Advisor
Together, we can fix your business and partnership problems
Chris Reich, Business Luminary
How to Get Out of a Business Partnership
There are important things to consider if you wish to leave a business partnership. This an overview of the steps to take to protect yourself when exiting.
Start by Reviewing Your Partnership Documents
If there are executed, valid documents, they will govern the process. Chances are there are no documents in place. As important as having Operating and Partnertship Agreements are, many, maybe most, small businesses never get around to this important step in business formation.
It is harder to reach an agreement with your partner without written rules for a buy/sell but it can be done. Getting out may require a lot of compromise on your part when the exit rules are undefined. Why? Your partner probably won’t agree to anything they don’t have to.
When there are no governing documents, be very careful about what you disclose about your position. Your partner will push back and you want to avoid being in a weakened position.
Make Some Lists
If the final goal is to exit the business rather than fix the partnership, the next step is to make a few lists.
- Beyond the initial investments to start the business, list all extra capital contributions by all partners. It’s not uncommon to find one partner has put in a lot more direct cash than the other. This is going to be the first hurdle in your negotiations if either party wants to level those contributions.
- List all liabilities that are outside of variableoperating expenses. We don’t need to see the phone bill, but we need to see leases, loans, and contracts that are in the partners names. Why? If you’ve signed a lease, that contract is between you and the landlord. You cannot exit that contract by working out a deal with your parter. All documents with personal names thereon will need to be revised at the discretion of the note/contract holder. Don’t forget company credit cards.
- List all assetts of the business. This can help support a valuation.
- List all tax and government liabilities with amounts and status. Why? It’s very common to ‘discover’ unpaid taxes during an internal review in preparation for a buyout. You cannot simply walk away from a tax bill. I’ve come across several cases where the State Worker’s Compensation was not being paid. There are fines, penalties, and back payments to be handled before a buyout can happen. Then, you want to be certain to remove your name from all documents.
Time to Get Serious
The next step is to set a price for your interest in the business and determine your terms. Expect to carry some paper unless money is no object to your partner. Why? People often start with this step without thinking everything through. Let’s say to will take a minimum of $100,000 for your stake. Your partner agrees but will only accept that amount if you’ll carry a note for 20 years interest free. Do you take it? If not, what do you think will be the next offer? Yes, indeed, you will be offered a far lower price.
Not doing all of the steps could cost you a lot of money. Even worse, 2 years from now you may get a letter of demand from the IRS!
Rough Out a Purchase Agreement
Once an agreement is reached, it’s time to sketch out the terms and make certain that all parties are in alignment. A qualified business attorney can now draft a purchase agreement. Why? You want to close the doors to any potential liability. If the business fails in time, you do not want to be responsible for outstanding debt.
Finally, it’s time to dissolve the partnership. We can use your attorney to handle this easy process. It’s up to the remaining partner to reform the business. Make certain that all taxes are current and that your name is removed from all liabilities. If your name cannot be removed from some liabilities, you’ll have to weigh the risk. If the risk is unacceptable, you might petition to dissolve the partnership (business).
It is possible to negotiate your way out of a business partnership but you must keep your cards close to your chest and your eyes wide open. Sometimes, an unscrupulous partner will go on a buying spree if it looks like a partner wants out. Just be careful.
This entire process can be very simple if there is agreement on the terms and there is no substantial outstanding liability.
If you need help, I work for all parties and the business to achieve the best possible outcome for all.
Chris Reich, TeachU
“The 2 big issues related to getting out of a business partnership are getting agreement on the price you desire and protecting you from liability. If there are no executed agreements in place, be very careful with how you proceed in your negotiations. It’s a good idea to get an adviser on board.”
Locking a partner out is a risky move. The locked-out partner has rights that if violated could entitle him to reinstatement and damages.
There are many things to cover in a solid Partnership Agreement. In this video, I’ll explain the items that need to be covered. You may have other items to include as well. Keep in mind that there are many ways to address each clause. My job is to offer you options and to help partners agree on how they want to address every line item.
Your Partnership Agreement protects your interests. Ideally you would go to a qualified business attorney and have the proper legal document drafted. But if you are putting it off because of the expense, you can get the key items on paper to protect you and your business.
There are times when you legally can and should lock your partner out of the business. But, those are rare circumstances. Locking your partner out, even if your partner is showing bad behavior, open you to potential liability.