A business partnership can be a great opportunity—diverse skills, someone to bounce ideas off and strategize with, and of course, shared risk. However, with shared risk comes liability. If your partner does something to lose an important client or incurs debt, your finances suffer too. Worse, if they get into a nefarious situation that lands you in court, you’re just as liable for the damages as they are.
Personal conflicts also arise. Perhaps one partner doesn’t have skin in the game, isn’t pulling their weight, or you’re simply not seeing eye-to-eye on the direction of the business. As a result, things have become hostile.
Of course, it doesn’t have to be that way. I offer some tips for a successful partnership in the following blogs:
- 10 Ways to Avoid Friction in a Business Partnership
- 8 Questions to Ask Before Entering into a Business Partnership
- How to Split Profits in a Small Business Partnership
Yet Business Partnerships Do Fail—Most of the Time
Despite best efforts, only about 40% of business partnerships work out. Whether they hit hard times or the pressure becomes too much, the majority of partnerships break up.
That doesn’t have to be the end of your business dreams. Many business partnerships end with one of the founding partners continuing with the business—forming and shaping it to their vision—in some form or another.
How to End a Business Partnership and Start Afresh
Whether you want out of a business partnership or are seeking ways to make it work better for you, consider the following options:
Remain in The Partnership, But Change How It’s Weighted
This is a useful option if your commitment to the business outweighs any personal disputes or challenges. With this option, you assume a majority stake in the business, while your partner takes a backseat without the expense of buying them out. You’ll need to revisit your partnership agreement and come to an agreement as to how you’ll split profits and assume new roles and responsibilities. If you don’t have a partnership agreement, make one now!
You should also outline a process for dissolving the partnership should this new arrangement fail.
Buy Out Your Partner’s Stake
If you want to continue the business but alone (and your partner is willing), you have the option of buying out your partner’s share of the business. This gives you the freedom to continue in business, relatively uninterrupted.
Seek out the help of an acquisitions lawyer to help with negotiations process. You’ll also need a solid understanding of what your business is worth—this can get tricky because you’re not just valuating your books and future earnings. Another factor to consider is the monetary value your partner’s expertise contributes to the business.
Another consideration is financing. Getting a loan can be tricky because you’re not technically investing back into the business. The transaction may also be perceived as a risk by a bank since you’re taking the business in a new, unchartered direction. Another option is to pay back your partner over time in installments—again, something to work out with a lawyer.
Dissolve the Partnership Altogether
Often, the cleanest way to get out of a partnership is to completely put it behind you. Refer to your original agreement and your dissolution plan. If it was well-written, it should outline important details such as how debts will be assumed, how contracts will be handled, and other important elements that need to be tied up before dissolution. You’ll also need to adhere to state laws that govern the dissolution of partnerships. For example, some states allow a partner with a 50% stake in the company to dissolve it on their own; others do not.
If you want to continue in the same line of business, you’ll need to come to an agreement about how customer relationships are handled. Who assumes these relationships? How will you split your customer base?
Don’t Have a Partnership Agreement?
If you don’t have a partnership agreement or one with a detailed dissolution plan, many law firms offer intermediary services. Try to mediate and come to an agreement that doesn’t involve a court of law. This can get costly, and, in the face of disputes, these typically result in a straight 50/50 split anyway.
Don’t Go It Alone
There are many legal intricacies in dissolving a business partnership. The easiest way to deal with them is to have a “pre-nup” in the form of the partnership agreement. However, whether you have one or not, always seek legal counsel to ensure all liability or risk is addressed and that you come out of the partnership with a fair and equitable way forward.
Disclaimer: This article is intended only as education and does not constitute legal advice.