When a business partnership changes, it can shift the company’s dynamic, creating confusion and frustration. Separating from a partner can occur for a variety of reasons. The most common reasons are:
- A partner plans to retire
- Partners conflict, preventing the operation from moving smoothly
- Partners are not sure they want to keep working together but are not sure what to do about it
- Minority owners bring in the majority of billings and no longer want to carry that weight
Important considerations during a partnership dissolution
Dissolving a partnership can be as volatile as a divorce, and it’s often difficult to separate emotion from sensible decision-making. Everyone has to come to an agreeable and mutual plan for the breakup. Otherwise, partners end up in a legal tussle, wrestling for what they believe they deserve. Key issues involved in the breakup of a partnership are:
- Financing: Partners must decide the best ways to finance the dissolution.
- Valuation: Partners must determine a fair market value for each owner’s slice of the business.
- Employee considerations: Employee consideration entails mitigating and identifying the dissolution’s impact on management, teams, and employees.
Partnership and buyout agreements
To protect their investments, partners often create a partnership agreement. The agreement outlines how assets are managed if a partner decides to leave the business.
A buyout agreement can have several provisions that control the direction of how to manage a dissolution. These provisions include:
- The events that can trigger a buyout
- The price paid for the soon-to-be ex-partner’s interest in the company
- Who the partner can sell their shares to, including those outside the business or to other partners, including any limitations
Possible scenarios of a buyout agreement
While buyout agreements cannot incorporate every possible scenario, partners should consider all likely situations in advance. Partners can also revise the agreement as needed. Events that may trigger a buyout include:
- A partner’s resignation or retirement
- A debt foreclosure secured by a partnership interest
- A potential divorce settlement that may influence an ex-spouse’s request for a partnership interest
- A partner’s personal bankruptcy
- An offer from a third party to purchase the partner’s interest in a company
- The death, disability, or incapacity of a partner
To effectively manage a partnership breakup, it’s important to keep matters calm and professional. Mediation may be a beneficial strategy to ensure all parties come to a satisfactory agreement. It is best to settle these matters outside of a legal proceeding whenever possible.