Business Partnership Advisor
Together, we can fix your business and partnership problems
Chris Reich, Business Luminary
What To Do When You Cannot Get Out of a Bad Business Partnership
If you are stuck in a bad partnership, there are options depending on your circumstances. Let’s look at your options.
Always Start with Document Review
Operating and Partnership Agreements, Amendments, and other Draft Agreements are the contracts that govern your options if these documents exist. If they do not, your situation is more complicated.
If there are documents, start with a professional review. If the documents are limited in scope and do not cover your escape, we’ll go to the next step.
Without the documents to govern your escape from a bad partnership, you’ll have to tunnel your way out.
No partnership docs? You can still get out of a partnership gone bad. Chris Reich
Consideration: Why Do You Want Out of the Partnership?
The answer to this question might determine your course of action. If you have fallen out of like with your business partner, you have a lot of very careful negotiating ahead of you. There isn’t anything in the law (we may consult an attorney on the specifics of your case) that gives you the right to walk away from a partnership because you are not happy.
You won’t get support from the law if your business partner treats you rudely. And, here’s a shocker, you won’t get support from the law if your partner makes bad business decisions even if those bad moves hurt the profitability of the firm. In short, no law says a partner must be nice or talented. Sorry.
If you want out for either of those reasons above, your exit will have to be negotiated with your partner. Should you choose to walk away from the business, you might lose your stake while keeping your responsibility for debt.
DO NOT WALK AWAY WITHOUT GETTING YOURSELF PROPERLY PROTECTED FIRST.
How to protect yourself if you must (not recommended) walk away. You need to ask creditors to remove you from obligations. That means you need to get your name removed from banking, credit cards, loans, notes, and leases. That’s not easy to do because most creditors want as many parties as possible to be responsible for payment. In the event of default, it makes it easier for them to collect. At least it gives them more collection options. You don’t want to get a bill for $50,000 because your partner stopped paying rent months ago while your name remains on the lease.
If you know of, and can prove that your partner has committed criminal acts, you have legal leverage. That means you can ask the court to dissolve the business if you choose. You can also use that knowledge as leverage to move your partner out of the business. Keep in mind, however, that you have an ethical responsibility to report illegal acts.
If your partner has conducted some weird business decisions that have done direct harm to the firm, you could possibly have cause to have your partner removed from the business. State laws vary on this but all states have provisions for remedy if a partner fails to meet fiduciary responsibility to the business. For example, I have seen partners launch a competing business and steal customers away. That’s not acceptable.
Be careful not to confuse failure to keep fiduciary responsibility with making a stupid decision despite there being times when it is difficult to tell which happened. For example, if a business has annual sales of $100,000 and your partner signs a $500,000 advertising contract, is she deliberating trying to bankrupt the business or has she made a very stupid decision?
If there is a legal violation there is legal remedy IF YOU WIN THE CASE.
You are better off avoiding the fight.
So What Can You Do to Escape a Bad Partnership?
The best solution is to get out by agreement with your partner. If you can reach some agreement it’s better and cheaper that fighting in court.
Your Partnership Is Not that Bad YET
Then please please please contact me about helping you get a good Partnership Agreement containing the necessary Buy/Sell provisions necessary to facilitate a future exit.
I cannot stress enough how important it is to have solid contracts in place and signed BEFORE a dispute breaks out.
Chris Reich, Business Moderator, TeachU
“If there is no Partnership Agreement, let’s work on one. If you need out because you can’t stand working with your business partner, do not walk away. Get advice and do it right so you don’t get debt hammered later.”
I recommend that partners talk through a specific issue and then draft an agreement (called a resolution) that sets a policy. You can keep this in a binder to serve as amendments (or foundation) to your Partnership Agreement. In this post I’ll explain how to talk about things that bug you with your partner and how to draft a binding resolution to fix the problems.
Unless you are in some sort of political business, you should keep politics out of your establishment completely. Of course, you have freedom of speech, but we are in very contentious times and displays of political or religious positions might be off-putting to to your customers.
Even when people get along well, having one partner’s relative handling the books just isn’t good policy. There is an inherent conflict of interest.