Why Every Partnership Should Have an Exit Strategy

Just like a celebrity marriage, every business partnership should start with a pre-nup.
Faith in Focus Columnist, The News & Observer Publishing Company
September 12, 2012

Your new venture is off and running. You and your partner are in sync with your goals for the future. As hard as it is to imagine the ending when you're just beginning, an exit strategy belongs in your business plan. 

Adding the exit strategy ensures your interests are protected and reinforces for the partners that the new venture is a business relationship, not a personal one.

Defining the exit strategy before any exit is underway allows all involved to agree on terms that will be fair. It's easier to make equitable decisions when an exit isn't already underway. 

"Unless you plan to be lucky forever, you’d better have one," writes Robert Wood for Forbes. "Without it, a closely held or family business faces a world of financial and tax problems on an owner’s death, incapacitation, divorce, bankruptcy, sale or retirement."

Here are eight reasons why you'll want to have an exit strategy mapped out in advance. 

1. 'Til death do you part. It is important that business partners have a plan for what happens if one of them dies. Details include what the financial compensation package will be like for the surviving family, who ends up owning the deceased partner's share and whether or not that stakeholder is going to work for the business.

2. Disability. A business partnership exit strategy should make it clear what direction the business takes if one of the partners becomes disabled, either physically, mentally or even financially.  This can be a difficult issue because the strategy must also address who is able to decide when a partner is disabled to the point where he or she is no longer an effective part of the business. Disability questions to address include everything from transfer of ownership to short and long-term disability payments, to what happens to health insurance coverage for a disabled partner and his or her family.

3. Divorce. The exit strategy should include guidelines for what happens if one of the partners gets divorced. While everyone may be happily married at the time the venture begins, personal relationships do go bad. If you don't anticipate the possibility of divorce, you could find yourself with an ex-spouse as your new partner.

4. Resigning. Partners resign from business relationships for many different reasons. You partner may decide to move on to the next venture or may want to step back from the hectic world of entrepreneurship. The exit strategy should define what happens when one partner is ready to walk away.

5. Fighting. One of the worst scenarios for dissolving a business partnership is when the partners are locked in a dispute and the only solution is splitting. This is a time when emotions can run very high and having the terms of the dissolution already in place limits additional conflict.

6. Merging or selling. So what happens to the partners when your small business becomes bigger either by merger or by sale? The exit strategy addresses how the proceeds will be split and what happens to each partner's interests.

7. Buy out. What if somewhere down the road one of the partners is ready to take it all on alone and wants to buy out the shares of the other? A carefully crafted plan will lead to a smooth financial transaction.

8. Peace of mind. Having a clearly defined exit strategy does more than just establish the rules for different end-of-partnership scenarios. It gives partners peace of mind as they work side by side that when the partnership has run its course, the outcome will be fair.

While it is possible to create an exit strategy plan on your own, the advice of an attorney or a tax professional may pay for itself when the exit is smooth and successful.

Carla Turchetti is a veteran print and broadcast journalist who likes to break a topic down and keep her copy tight. That's why this bio is so brief! Carla blogs via Contently.com.