How do I deal with my business partner wanting to leave?
If your business partner wants to leave, handling the situation with care and professionalism is essential to minimize potential negative impacts on the business.
If you own a business involving one or multiple partners, you must be prepared for worst-case scenarios, including a business partner split. How does it affect the business if one partner wants to leave the partnership? Well, that depends on the structure and the type of your business. Usually, at the beginning of any business partnership, all the partners envision a lifetime or, at least, a long-term relationship. Unfortunately, with time, numerous factors can lead to a split in the partnership. For instance, I often encounter situations where a partner wants to leave the partnership because the goals and expectations change over time.
Some unforeseen incidents, such as injury or death, may also result in a split in the partnership. For these reasons, all partners must agree on a written exit strategy. Unless it is in writing, the business may be forced to dissolve immediately if one business partner wants to leave the company. Remember, when one partner is absent, the responsibilities for carrying out the business activities fall on the shoulders of the other partners.
For this reason, many partnership businesses have critical man insurance to cover the business if a partner cannot carry out their responsibilities. This insurance ensures the continuity of the company. It prevents the other partners from inheriting a spouse beneficiary or any other beneficiary of a deceased partner through intestate succession or a will.
Here are some steps you can consider:
Communication:
Have an open and honest conversation with your partner to understand their reasons for wanting to leave. This can help you address any concerns and find solutions.
- Review Partnership Agreement:
Refer to the partnership agreement that was established when you started the business. It should outline a partner’s departure process, including buyout provisions, non-compete clauses, and other relevant details.
- Valuation of Partner’s Share:
Determine the value of your partner’s share in the business. This may involve assessing the company’s assets, liabilities, and financial health. Work with a professional, such as a business valuator or financial advisor, for a fair valuation.
- Buyout or Sale Options:
Discuss buyout options with your partner. This could involve a lump-sum payment, installment payments, or a combination. Alternatively, you might explore selling the business and dividing the proceeds.
- Negotiation:
Be prepared to negotiate terms that are acceptable to both parties. This might involve compromises on both sides to ensure a smooth transition.
6.Transition Plan: Develop a transition plan to minimize disruptions to the business. This could include identifying how responsibilities will be transferred, notifying clients or customers, and addressing ongoing projects.
- Update Stakeholders:
Inform key stakeholders about the changes, such as employees, clients, suppliers, and other partners. Assure them that you are committed to maintaining business continuity.
- Document Everything:
Document all agreements, decisions, and transactions related to the departure. This documentation can be crucial for legal and financial purposes.
- Prepare for the Future:
Consider how the departure will impact the business in the long term. Assess whether changes to the business structure, such as bringing in a new partner or restructuring, are necessary.
- Legal Approach
You must enter into a partnership agreement to prepare for a situation when your business partner wants to leave the partnership. It is always better to sign the deal with the help of a lawyer. The agreement should contain the conditions for the dissolution of a partnership, such as whether the business will continue to operate and what the buyout provision should be. Here, a formal collaboration dissolves the moment one partner leaves the company. This is why partners invariably convert their partnership into a written agreement, LLC, or corporate entity. The LLC or corporation maintains its continuity even when a partner exists.
- Substituting a partner
If the partner who wants to exit the business doesn’t have the capital to accommodate the exit strategy or the other partners do not wish to sell the company, you can replace a partner in the business. The other partners might consider restructuring the industry by inviting a new investor to return the existing partner and buy them out.
- Calculating Profit Margin.
If you plan to sell your business when your partner leaves, the selling price primarily depends on the profit margin. When you can show the recent profits and estimate the profit level in the upcoming years, you will likely know how much money your partner will receive from this business sale. A departing partner is entitled to a share of the profits earned until his dissociation.
- Valuing the assets.
A departing partner would want the assets, such as patents, trademarks, equipment, inventory, cash on hand, land, buildings, etc., listed and valued. It would help if you listed all the assets to give your partner his fair share in the business, as a dissociating partner is entitled to their share of the company’s total assets.
- Calculating capital needs.
After giving the departing partner his fair share, you may need more money to run the business. Under such circumstances, you must determine the operating capital you’ll need and decide whether to pay the whole amount to your selling partner in one lump sum or pay him over some time. Even if your business has a limited amount of cash, the partner is still entitled to a lesser amount upon exiting the business.
- Discuss future earnings.
When your partner plans to leave, discuss the coming years’ profits and earnings with your partner. You can use the current financial data to predict the earnings. While a departing partner is not entitled to future earnings, paying the departing partner what they are entitled to may be difficult if the company expects a loss.
If your business partner wants to leave the business, make all the calculations and settle all the legal formalities before the partners exit the business. Remember that each business situation is unique, and your steps will depend on the specific circumstances and the terms outlined in your partnership agreement. Seeking professional advice and maintaining open communication throughout the process help ensure smooth transitions for all parties involved.