When Business Partners PartBy Nina Kaufman, Esq.
It could happen to you. Plan for it now instead of despairing later.
” ‘Til death do us part,” go the marriage vows, and business owners often feel the same way. They go into business with another person thinking it will last forever. Or maybe they’re not thinking about the end game at all.
Either way, they’re merrily humming along until . . . something happens. A partner dies. Becomes disabled. Cheats. Steals. Wakes up one morning at 49, pregnant with twins. Or maybe you simply don’t get along anymore.
When that “something”–that partnership-disintegrating event–occurs, you want to be prepared. In advance.
By the time it comes it’s too late to scramble for an exit plan. Emotions ride high. Profound feelings of loss, betrayal, guilt, sadness, anger, frustration, resentment–even the desire for retribution (sound like divorce court?)–swirl about a dissolving partnership.
And when emotions rise, intelligence plummets. We’re not thinking at our rational best when we’re also entertaining murderous fantasies about wrapping our fingers around our partner’s throat.
Thus, it’s vital to have a business ownership agreement in place that can cover these exit issues. An ownership agreement goes by several names: Technically, a “partnership agreement” applies to partners in a general partnership; a “shareholders’ agreement” applies to shareholders of a corporation; and an “operating agreement” applies to members of a limited liability company. Whatever you call it, that agreement should set the ground rules for parting partners.
Through this process, you can agree in advance how to divide assets should you part ways. If you don’t have anything in writing, you’re at the mercy of the courts, the judge (or jury) and legal precedent. That becomes a time-consuming, expensive and emotionally exhausting process. So why leave it to chance?
Here are a handful of issues you’ll want to decide in advance:
- Exit trigger events: Under what circumstances will a partner have to sell back her ownership interest in the company? Death and disability are usually high on the list, but what if a partner relocates to another part of the country? Or gets divorced? What if she files for personal bankruptcy?
- If your ownership agreement doesn’t address these issues, you could find yourself tethered to a dead weight.
- Buyout price: How much will the remaining partner have to pay the departing partner? Have you chosen a valuation formula that makes sense for your kind of business (say, a multiple of earnings)? Get your accountant’s input on this, too.
- Penalties: Will the buyout price depend on the reason the partner is leaving the company? For example, will you use one formula for departures for “fair” or neutral reasons (change of lifestyle) and another for negative reasons (was caught with her hands in the company till)? If so, you need to tie your exit trigger events closely to the payment plan.
- Timing: If you’re the “dearly departing,” how long will you (or your estate) have to wait to get paid in full? Can you receive your share in one lump sum?
- Intellectual property: Upon departure, who will own the intellectual property created while both of you were part of the company? Was there anything that pre-existed the business that an owner might want to take with her? If so, this should be in writing.
- Confidentiality and customers: What happens to the company’s confidential information when a partner departs? For that matter, what happens to the customers? Can the departing partner contact your company’s customers (or employees) to woo them away? If not, be sure your agreement includes penalties that can be imposed if that happens.
Breaking up is hard to do even under the best of circumstances. But you can ease the pain by speaking to an attorney and creating an ownership agreement to determine–well in advance–how you and your partner will handle the situation. As the proverb says, “An ounce of prevention is worth a pound of cure.”
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