You Don’t Have to Be Stuck with a Bad Business Partner

If you are in a partnership with a bad business partner, there are things you can do about it.

Review Your Documents

Every responsible article on this topic will start with the recommendation that you review your partnership agreement. That’s an obvious course but what if you don’t have a partnership agreement? There are actions you can take. No agreement may be better than a bad or poorly drafted agreement.

If you are in a good partnership and have no agreement in place, get one. That document can save you a lot of grief should things break down later,

What’s the Business Worth?

This may seem like an odd question but it will partially determine your course of action. You’ll want to be careful if the business has a high valuation. You won’t want to lose your interest in the business by ‘walking away’. A business with little sale value can be treated differently. It’s important to keep in mind what is at stake as you develop your plan.

Consider All Liabilities

Next, consider the debt position of the business. Remember, YOU are equally responsible for company debt. Simply walking away won’t solve all your problems. You can’t walk away from the debts even with the agreement of your partner! Creditors like the landlord like having multiple parties responsible for the lease. However, in some circumstances, a landlord may allow a change of parties to a lease. Point is that your partner cannot release you from liabilities where your name appears on the contracts. This includes leases, taxes, credit cards, vendor agreements, and more. Be careful. You walk away and the business fails, you could be responsible.

You Can Get Out of a Bad Partnership

Let’s say that your business has little value in terms of a potential sale. If you cannot fix the working relationship with your partner, then you might offer your share in the business to your partner. If he accepts, then you’ll have to work with creditors to have your name removed from existing debts. This can be done. If you feel that your partner will be able to succeed, you could take the risk that he will pay the debts. You will need to draft an agreement that as of a given date you are no longer responsible for new debt. Then it’s a good idea to notify creditors who may wish to re-evaluate the creditworthiness of the business.

Partner Will Not Cooperate

If your partner refuses to buy or let you out, you still have the option of forcing your hand. You issue a notice to your partner that you intend to leave the partnership and then you file a form (for an LLC) with the Secretary of State in your state called a notification of dissolution.

When a partner leaves, the partnership is dissolved if there are only 2 partners. After notifying the state, you must notify creditors and begin a process of dividing the debts of the closed business.

Your partner may then propose assuming all the debt and starting a new LLC or he may file a court action to stall the dissolution.

Court is an expensive funhouse and few lawyers would even take the case unless there was a worthy amount of money at stake.

If the Business Has Substantial Value

If the business has substantial value, and if your partner refuses to cooperate or even speak with you about a buyout, you may need a lawyer. If you’re will to sacrifice your stake, you will probably be able to negotiate something. If you expect to recover full value for your share of the business you had better brace for a fight though I always recommend starting with a less threatening approach.

If you choose to go the court route, you’ll need to document your partner’s misconduct. For a court to act on your behalf, your partner will need to be guilty of pretty egregious acts such as starting a competing business, breaking the law, or stealing from the company.

Summary

If you find yourself in business with a bad partner, you aren’t trapped. It’s fairly easy to escape a business with a low valuation. Things get a lot more difficult if there is a lot of money at stake. Always start by trying to work things out yourself. Get the help of a mediator like myself who may be able to negotiate for you. If your partner refuses all conversation about the subject, you may need a litigator. Though the process is quite expensive and can take years, it will conclude the dispute though you may not like the outcome.

All the best,

Chris Reich, TeachU

“If you have a bad business partner, contact me for help either to change the circumstances or to get you out.”