Exit Options: Business Partner Breakups

March 01, 2017Exit Strategies

Two people struggle to agree on much these days. Just take our current political landscape as proof. Regardless of how aligned you and your partner are on goals for the business, your personal lives will take different paths. Between marriage, children, divorce, purchasing real estate, travel, and retirement, business partners diverge on different paths in life.

That means one of you will want to exit the business before the other.

Options for Business Partnership Exits

Rarely do two business partners want to call it quits at the same time. Should that happen, it’s a straightforward business sale where we divide the proceeds.

Life is seldom simple.

Typically one or more business partners chose to exit prior to the remaining partner(s). In that case, there are several things that need to happen. First, you need to value the business. Second, you need to determine the buyout terms. Third, you need to settle on a payment schedule and exit timeframe. Other issues such as non-competes will need to be resolved as well.

This is all made much easier with a buy-sell agreement in place. We’ll touch on that shortly.

Challenges and Speed Bumps

Most partnerships involve a ying–yang relationship. One partner excels at operations while the other dominates sales. The two partners complement each other, so when one leaves it creates a void.

This void needs to be filled for the business to succeed, which means hiring a replacement.

The second major hurdle comes to financial stability. Remaining partners don’t usually have the cash to buy out the exiting partner. Hiring a replacement compounds cash flow issues. Pulling too much out of the business puts the success of the business at risk.


Leaving Emotions on the Sideline

The biggest downfall for these breakups comes into play when emotions seep into the negotiation room. Rather than logically discussing terms and considering the welfare of the business, terms such as “I deserve…” or “If I don’t get what I want…” turn a business arrangement toxic.

Both remaining and exiting partners need to prioritize the welfare of the business. Emotions, and let’s face it, entitlements, need to stay on the sidelines.


Communication and Relationships

Regular communication strengthens any relationship. Just like keeping a marriage healthy, your partnership needs to be filled with constant communication. This extends beyond just talking shop. Make sure to talk to your partner about long-term goals, personal ambitions, and more. When your partner knows that you plan to spend your retirement traveling the world, it won’t come as a shock that eventually you need to bow out of the business and pack your bags.

The better state your relationship is when nearing an exit, the better you will be able to weather the change.


Avoiding the Nuclear Option

Every year we have partners walk into our office ready to take the entire company down just to get back at their partner. When they reach this point, we call it the nuclear option. It’s the equivalent of a grenade tossed into the middle of a business. Rather than constructive conversation around options, we spend all our time on damage control.

Much like newlyweds never anticipate the marriage ending in divorce, business partners always believe that it will never be their business in the operating room. Yet over 80% of business partnerships fail.

The most effective route to successfully navigating an amicable partner breakup falls to having a comprehensive buy-sell agreement in place. It outlines specific terms and guidelines for leaving partners.

The lack of this agreement leads to the majority of brutal partner divorces.

Dissolving a business partnership can be a successful business exit option, but it’s a fine dance between effective transition and total business demise. Far too many business owners find themselves with the latter.

If you and your business partners currently don’t have a buy-sell agreement in place, this needs to be addressed immediately. Regardless if you are looking to leave today or twenty years down the road, this document will be the difference between the nuclear option and a successful partner break up.

Contact our team at ECG to explore your exit options or help put a buy-sell agreement in place today.