Business owners start their journey with a partner for countless different reasons. Sometimes they bring additional expertise. Other times, they complement their skillset. While the relationship started out well, there always comes a time in the business life when one of the partners wants out.
The exit plan for a partner can go in many different directions. The better the communication between the partners, the more successful the exit will be.
The partners have these three main options:
- Sell the business and both leave;
- Leaving partner sells their partnership interest;
- Leaving partner leaves and keeps partnership interest.
Selling the Business
This is the cleanest and easiest departure.
Many businesses are built off of a team approach. Each partner brings a specific skillset that the other partner doesn’t have. Removing that skillset often leaves the other shortchanged. This also brings emotional feelings and situations that need to be navigated, such as “leaving your partner hanging.”
If you choose to sell and the remaining partner wants to keep working, then make employment part of the deal when working with buyers.
Selling Your Partnership Interest
In this option, the leaving partner is bought out of their share of the business.
The first thing to consider is if there is a Buy/Sell Agreement in place. Many times, the remaining shareholders have the first right to buy the departing partners share interest before you can take it to market. In reality, there is a very small market for selling minority interest shares in a privately held company. Most investors are hesitant to work with a partner they have never worked with before.
Typically, the transaction takes place with the remaining partner. Rarely does the remaining partner have the cash on hand to buy the other partner out. This leads to financing and value conversations.
It’s not just the cash to buy out the leaving partner that comes into play. When a partner leaves, they will need to be replaced with an employee to fulfill their responsibilities. Add this to the debt financing necessary to cover the shares; it can put a financial strain on the business. Things become more complicated if the company currently has debt-financing, bonding, and licenses that the departing partner is needed to carry.
Keeping Your Partnership Interest
The final option is to leave the business, similar to how an employee would leave, and keep the interest. Many times, this is a premature exit. The leaving partner still wants to be bought out of their interest. They are waiting until a time when the business can get financing, sell, or a liquidity event occurs.
This works well if the departing partner does not require a liquidity event in order to leave. In this case, the dividends or distributions are enough financially to allow them to leave.
This departure is less than an exit but more of the exiting partner quitting the employment agreement. It can work well for both parties as long as it achieves the personal objectives of both partners.
Leaving your partnership is not all doom and gloom. It can be handled where all parties can achieve their exit without imploding long-term relationships and risking the success of the business. In order to do that, you need to have extensive communication coupled with a strategic plan.
This is where I come in. Together, we can work to maintain the relationship while building the exit terms in a manner that protects the business for future success. As a neutral third party, I also help both partners remove emotions from the transaction. This helps streamline the process.
Contact me today to help establish a successful roadmap to exiting your partnership.