The most natural time to think of ending a business partnership is probably not when it is beginning. However, according to those experts who create, sustain and dissolve business partnerships, planning ahead to end a partnership is a great way to ensure it happens gracefully. Planning to end a partnership may also reduce chances it will fail.
The terms and manner of dissolving business partnerships may most easily be dealt with early on.
"It's easier to have these conversations when everyone is still on the same page and things are going smoothly," says Katherine Heptig, a partner with the Rivkin Radler law firm in Uniondale, New York. "When you're having an issue and people aren't getting along, it's much harder to come up with a solution that works for everybody."
Retaining the Choice
Another reason for business owners to stipulate how they plan to dissolve business partnerships? If the partners don't, the government will.
"If you're silent on the issue, state law will govern," Heptig warns.
State laws may, for instance, let a majority owner force dissolution on other partners. If partners prefer another arrangement, such as requiring two of three partners to vote for a split, they can have it if they specify it in the agreement, she says.
—Lise Stewart, director of the Center for Family Business, EisnerAmper
Describing this sort of thing is a key task of any partnership agreement, says Lise Stewart, director of the Center for Family Business for New York City-based accounting firm EisnerAmper.
"A partnership agreement is a simple document that says this is how we want to work together, these are our values and this is what we want to do with the company," Stewart says.
The agreement lays out long-view strategies and objectives, Stewart says.
"Do we want to build it up to sell? Do we want to pass it on to our kids? Do we want to reinvest for growth or is this a lifestyle business where we want to maximize our personal gain?"
Talk Early or Pay Later
One benefit of talking about these matters early on is that it may help partners learn to discuss sensitive topics. This can prevent later misunderstandings and disagreements that bring about a need to dissolve business partnerships.
"The reality is that most partnerships don't last," Stewart says. "And the reason they don't last is that they don't talk about this stuff. But if we do the planning early, you may never need this."
Terms of Ending
A partnership agreement's dissolution terms may describe how a dissatisfied partner can be bought out by the other partner or partners. It may state whether new partners or investors can be brought in. It will likely specify how the value of the partnership interest is to be estimated, and how the price for a buyout may be paid.
The agreement also might describe events that trigger dissolution, such as a partner's inadequate performance, and exactly what inadequate performance looks like. It will often set executive pay benchmarks, attitudes toward growth and debt, and policies for hiring family members.
It can be challenging to get new partners to discuss how the arrangement might end.
"Most people going into a partnership don't want to hear of that sort of thing," says John Schaefer, a family law attorney in Birmingham, Michigan. "You're probably not going to get much cooperation in that regard. It's like planning a divorce."
Limits of Planning to Dissolve Business Partnerships
Trouble may still arise even after careful planning. Los Gatos, California-based executive recruiter Dave Arnold had a partner from whom he'd grown apart. One summer, the two discussed their diverging interests and agreed on a written plan to amicably split by the end of the year.
"We came up with what I thought was a workable separation agreement," Arnold recalls. "Then reality set in that this was going to happen and it didn't go off as smoothly as I'd hoped."
Just before the agreement's effective date, his soon-to-be-former partner became concerned about the bookkeeping being used to calculate how financial assets would be distributed. The other partner secretly met with an attorney to draft a different agreement.
"Ultimately it was financially amicable, but it ruined our friendship," Arnold says.
Handling the Emotional Side
Arnold advises recognizing the emotional side of a business breakup.
"You can be as rational as anybody, but when it comes down to it, you're still breaking up," he says. "Even when it makes business sense, it tugs at the heart. And when the heart gets tugged, emotions get involved."
Stewart stresses, however, that planning ahead for emotional trouble is wiser than coping with it as it comes up.
"Deal with emotional issues before emotion is the issue," she says.
Heptig says the best resolution of many partnership dissolution processes may be to avoid dissolution. An agreement that lets a partner or partners leave without actually dissolving the partnership can avoid significant tax and other costs.
But whether a partnership ends or goes the distance, the time to plan for it is well before the end.
"This isn't something you want to make up as you go along," Heptig says.
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