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When Good Partners Go Bad

Carla McCabe
Jul 27, 2018

We’ve all seen it – the marriage made in heaven that sours faster than you can bat an eye. No one saw it coming; they thought it would never happen to them.

Business partnerships can be a lot like marriage. At the onset, attending to details like what happens if it all falls apart can seem silly and unromantic. After all, what could possibly go wrong?

But as any experienced business owner will attest, things go wrong all the time. Unfortunately, business partnerships are very similar to marriage – about 50% end in divorce. The financial stakes in business partnerships, however, are generally much higher than they are in marriages.

By definition, a partnership is a voluntary relationship between individuals or entities, and is characterized by cooperation and responsibility intended to focus on a common goal. Partnerships are formed for a variety of reasons but, regrettably, are usually based more on hope than research and proper due diligence.

It’s no surprise that the potential for a partner break-up is one of the top, often overlooked, reasons for having a strategic plan. As an advisor, you would probably recommend a prenuptial agreement for your wealthy client to offer protection in the event a marriage fails; business partnerships should take the same precaution.

When a partnership runs into trouble, much like a marriage, the survival of the business is threatened. That’s why it’s important to draw up an agreement outlining responsibilities and areas of authority for each partner, including expected hours and financial commitment, when a partnership is formed. It is also necessary to discuss strategic growth plans and exit strategies. A legal document should be created that details ownership percentages and a buy-sell agreement should be executed to end the partnership, if needed, without ending or hurting the business.

A buy-sell agreement is the preferred tool for partnerships, LLCs, and corporations to continue the business after the death or exit of one or more of the owners (this can be incorporated into your Operating or Shareholder Agreement). The agreement performs many functions during the lifetime of the business and if structured properly, will ensure a smooth transition of ownership. Most importantly, the buy-sell agreement is the core of the business’s continuity plan and the owner’s estate because it controls who can (or must) buy a departing owner’s share, the events that will trigger a buyout, and the price that will be paid upon an owner’s exit.

The good news is that it’s never too late to construct these precautions. Perhaps you’re already in a partnership and are lacking formal documents to deal with the “what ifs” if they do happen. A partnership agreement can dictate everything from who can sign documents, to how to deal with a partner’s major illness, to how to break up the firm. It’s also smart to install safeguards of your investment in the venture whether by vesting, a provision in the partnership agreement to buy out a partner, or making sure that no single partner has exclusive access to particular company assets.

Also, keep in mind that there may be a dispute between you and your partner(s) over the value of the firm and each partner's share. This is often one of the more critical points when ending a partnership. Consider hiring an outside firm to put a value on your business. A more practical solution is to describe a process for determining the value, whether it be according to a formula or through an appraisal of the company’s fair market value. Also note that when emotions are running high, as they often do during a break-up, the valuation of the business can be hotly contested and may take years to resolve.

What they say is true - breaking up is hard to do. Make certain that you have the proper documents and plans in place should the romance fade and the honeymoon end.

More articles related to: Practice Management

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