Planning a Smooth Exit From a Partnership at the Beginning
When two people form a business, they often imagine a great future. They picture doing well and building their small venture into either a local favorite or a national corporation. Many partnerships do just that, but the future holds limitless possibilities. It is possible that an individual will want to or be forced to leave the business. If this happens, it is best if the partners already had a plan in place. When drafting a partnership agreement, individuals and their attorneys can work to negotiate how each partner’s portion of the business will be handled in various exit strategies. For more information on how to plan for the future when formalizing your partnership, reach out to our office for assistance.
Futures to Consider
If the business is successful, it is likely that someone will become disabled or pass away while the company remains active. Partners should always consider how they will handle the portion of the business owned by a partner who is no longer able to work or dies.
It is entirely possible that one of the partners will want to leave the business because of business disputes or personal reasons. Whatever the motivation to move on, it is better if the formation documents state how this situation is handled.
Business partnerships can become contentious over the years and one partner may want the other to leave. The formation documents may set out scenarios in which one person can ask the other to move on.
If the partners are married, they must address what will happen if they divorce. It can be difficult to continue to run a business with your ex-husband or ex-wife.
What Happens to the Other Partner’s Share?
Each of these situations can call for a different outcome. It does not have to be a one-size-fits-all solution. For instance, one partner may want a son or daughter to inherit the business when he or she passes. Many times business partners do not want to inherit a new partner through a will or intestacy, but this may be what each partner wants – to leave the business to the next generation. However, the most common outcome for these scenarios is that one partner buys out the other.
Defining the Buy Out
One of the most important aspects of the exit strategy is determining how one partner will buy out another in the future. This calls for specifics because any sort of ambiguity will lead to business disputes.
Your formation documents should define how you value the company. How much the business is worth is a topic on which many partners disagree. The exiting partner will want the highest value in order to receive the highest payout, while the remaining partner may want the exact opposite. By choosing the business valuation method beforehand, the partners have one less thing to argue about.
The documents should spell out whether the buy out will be a lump sum or on a payment schedule. Lump sums can be a dangerous proposition because the partners cannot predict how well the business will be doing at this time. However, if the business is a corporate entity, the business itself can by the partner’s shares.
Plan for the Future with a Business Transactions Attorney
No matter what happens in the future, each partner needs to consider how one of them can leave while leaving the business intact. Without proper planning, the exit of one partner can mean the downfall of the business. It may have to be sold or simply closed. But with proper planning, the business can continue to grow even if an original member moves on. For more information, contact the Law Offices of Larry E. Bray, P.A. in West Palm Beach and let us assist you.
