Partnerships break up for many reasons. Here’s how to make the transition safely and respectfully.
Most frequently, partners in a small business are very close friends, family, or long term trusted sweat equity business relationships. Perhaps one of the most difficult challenges confronting this relationship is how to break it up when the time is right. There are always many emotional issues which cannot easily be worked out, but the equalizer is found in how a buyout is accomplished and most important what the price and terms are. If done fairly, the relationship and the business have a chance of surviving. If not, more than likely it will either not occur at all or the relationship will end, with a long term very negative air, and an enormous personal loss as well a high likelihood the business will either suffer or cease to operate.
Here is a way to resolve this difficult transition, safely and respectfully for both partners in a buyout situation.
Partnerships break up for many reasons. Some personal, some financial, some ego-driven. When this happens there are two important goals which must be achieved:
1. Preservation of the business
2. Preservation of the relationship
There is only one way to accomplish this:
With a fair deal for both sides. If adequate consideration is paid, and the process was not injurious to the players, and if the terms of the payoff are agreeable to both sides, then everyone will survive even if there are a few ruffled feathers.
The devastation and destruction which so frequently is associated with partnership break ups can be overcome if a buyout plan is established at the beginning of the relationship. If everyone agrees on it at the onset when a breakup occurs and the plan must be utilized everyone will remember they already agreed to this process. It was fair when they agreed so it must be fair now, and disagreement is less likely to occur.
Thus I have a strategy that either partner can invoke, knowing the potential consequences. Thus it is only utilized if the partner is actually ready to face the possible implications.
Here is the deal, simple, honest and fun. Everyone wins, but no one knows who will be the surviving partner until the strategy is played out.
First, it is important that both partners have a full grasp of the numbers: the asset value, the goodwill value, accounts receivable, account payable, an income statement and a balance sheet. Then the partner wanting to get rid of the other partner and buy him/her out makes an offer. The offer had best be as high as reasonable because if the opposing partner chooses, he/she can turn around and using that number offered to him/her, can opt to buy out the original offering partner for that price he/she offered. The original offering partner can up the ante and offer more, but the game is over and the second partner (the one who was first offered too low an amount) and now exercised his option and made a turnaround offer with the same number which is now binding on the original offering partner.
This process creates equality, is respectful and assures fair value for the partner being bought out, whichever one it may be.
In addition at the beginning when this plan is agreed to, the terms of the deal are also agreed to and since no one ever has cash, and to make certain the two partners can both implement the buy out, the agreement further states that the bought out partner will accept a note for five years at 8% interest payable monthly, or what ever terms are determined appropriate in advance, in the beginning.
This works. The offering price by the first partner is high as the offering partner knows if it’s too low the other will buy him out for the same price. If it’s high enough the other partner may accept it, either way, it’s respectable, affordable and a win for both. The business and the relationship can be spared destruction which so usually occurs.
If you have a 50-50 relationship and have not considered exit strategies for an individual partner, add this strategy at your next board meeting, it is not too late.
I have seen it work and it works very well.