HOW TO BREAKUP WITH YOUR PARTNER, YOUR BUSINESS PARTNER THAT IS, WITH NO FORMAL AGREEMENT IN PLACE
As with any romantic relationship, nobody enters one thinking that it is going to end, let alone end ugly, and as with love, sometimes money can make us blind. This can distract you form the fact that just because you think the business relationship might never end, or you’ve known this person for X amount of years, doesn’t mean you shouldn’t have an exit strategy or some sort of formal partnership agreement.
As much as 70% of business partnerships end up failing, and as unfortunate as that may be, it is essential for the process to go smoothly as to not encounter any personal and/or financial headaches. There are numerous reasons in which the partnership can end; bad blood, retirement, career change, maybe a partner has become incapacitated. In these situations, the business relationship usually ends amicably provided the partners are understanding.
As with all relationships, there are some that do end badly. Hiring an attorney to create a business partnership that is written allows those breakups to go as cleanly as possible. Most agreements outline how the partners will run the business, detailing how decisions are made, how responsibilities are divided, how disagreements will be resolved, and a dissolution strategy.
Usually in this strategy, it will contain a “buy-sell” agreement. A buy and sell agreement is a legally binding contract that stipulates how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business. Most often, the buy and sell agreement stipulates that the available share be sold to the remaining partners or to the partnership.
One reason a business partnership agreement is not set up is because they are not required by law. This can be very risky because if the partners want to go separate ways as they are not seeing eye to eye anymore, coming to an agreement will be even more difficult. This can lead to mediation becoming the best solution, which is usually costly and tends to add with everything being split 50/50 anyways.
Seeking legal advice from an attorney is always the best route when you need to leave a partnership without a written agreement in place that details how to dissolve the relationship. The type of partnership and status of the departing partner will impact the final outcome, but here are seven steps that can help you execute a clean dissolution of a business partnership when there isn’t a pre-existing strategy in place.
Step 1: Consult with an attorney.
It is smart to meet with an attorney at the beginning of the partnership to set up an agreement, but if the time comes to dissolve the partnership without one, its still advised to meet with an attorney. Understanding state laws and the impact of relevant agreements such as company bylaws and controlling documents is difficult for the average person. Be sure to hire your own private experienced business attorney. Using the company lawyer is not advisable, as the company is usually in their best interest.
Step 2: Consider the state of the business.
Before discussing or deciding to leave the partnership, make sure that you have a firm grasp on the financial health of the business. What do we mean by financial health of the business? You should have a rundown on the worth, assets and liabilities you may receive (will correlate to your ownership interest), contracts, liens, mortgages, or other personal agreements you are locked into and will be held personally responsible for even if you decide to go through with the dissolvement. Choosing to have the partnership appraised by a business valuation service is always a good idea, however, it will make it aware to the other partner(s) that you may leave.
Many factors may effect your business. From a global pandemic, like the one effecting the country at the time this article was written, to health issues amonf the parties, you will see an effect on the value of the business. It is also critical to think about how that value will change as the break up occours. What value will each party take with them that they brought and the business does not own? Are you stuck in a long term contract or lease with a personal guarantee? All of these things will effect the steps you take moving forward.
Step 3: Stay friendly. (if you can)
Odds are that before or throughout this business relationship, you and your partner(s) are friends. Whatever the reasoning is for wanting to dissolve that business relationship, doesn’t mean the personal relationship has to end. Communication is key in any type of relationship, and business partners are no different. Ones that communicate are more likely to stay out of court. You may be able to agree to sell your stake in the business to an outside party or the other partners could agree to buy your shares. As previously stated, having an attorney help you throughout this process is highly advised.
A common way of breaking up a deadlock over ending a partnership is called a “Texas shoot-out”. The principle of ‘the Texas shoot-out’ is most commonly applied where each member owns 50% of shares and one or both partners want to end the relationship. This mechanism commences with one member notifying the other member of his/her intention to sell to that member his/her 50% shares at a specific price. This offer must then be accepted; otherwise the declining member is obliged to sell all his/her 50% shares to the proposer at the same price.
Refraining from dissolving the business partnership is an alternative option. Instead, an agreement can be reached that changes the weighting, giving the majority stake to one partner along with the sole ability to make decisions. This allows the less committed partner to stay involved while relinquishing some of the headaches and control.
Step 4: Explore Mediation.
As stated earlier, if coming to an agreement becomes more and more difficult, you may turn to mediation to solve it. With mediation, a mediator, who is usually a third-party neutral entity, will meet with all interested parties. Said mediator will listen to all sides and help the partners to achieve terms that are agreed upon by everyone. While it is almost always less expensive than getting into a lawsuit, mediators do charge for their services.
Step 5: Create a dissolution plan.
A dissolution plan should always be included in a business partnership agreement. You never know what the future will hold and it is better to be safe than sorry. A dissolution plan should include the following
- A timeline that goes all the way through filing the final tax return
- Documents to be filed
- Plans for notifying stakeholders, including employees, vendors, and customers
- A timeline that goes all the way through filing the final tax return
- A detailed list of tasks that need to be performed
Step 6: Start to Separate.
Once you have come to terms with all parties, as well as assessed assets and liabilities, it is time to start to separate yourself from the business. You can not just contact clients and tell them you’re leaving. You want to get rid of as much liability as you can by either canceling or renegotiating contracts and loans. If you are unable to do that, setting up an escrow account from which obligations will be paid is the next best thing to do. Having the partners sign documents that would personally indemnify the departing partner is also a good option, but that can quickly become complicated and would require the advice of counsel.
Writing a separation agreement is not easy and it is definitely recommended to use an attorney to help write it, and clearly identify who owes what so that there can be no disputes or claims against you down the road. Even if the departure is uncontested, you never know what can happen if the company faces an unforeseen crisis or supersized tax bill.
Removing your name from all company documents, including loans, leases, and contracts are the next steps you should take once the previous step is completed and executed by all involved partners. You also need to make sure any commitments the company makes to you are enforceable and in writing, and that you understand the steps you can take if the partnership breaches its obligations. Other important items to address in a separation agreement include mechanisms for ensuring debts from which your name can’t be removed or paid, a right to audit the company’s books if you are owed money in the future, and how your name will be removed from documents in cases where it can’t happen immediately.
Step 7: Dissolve the partnership (or the business).
State law governs the dissolvement of business partnerships, so it is especially important, when there is no agreement in place to detail the separation, to get up to speed on that statutes of your particular state. From the time a statement of dissolution is filed to the end of the partnership, it usually takes about 90 days. The process strives to ensure that partners won’t be held responsible for each other’s debts and liabilities and that they can’t enter into a binding transaction on behalf of the partnership.
If you are run through some other type of entity, such as an LLC or Corporation look at both the governing documents and the state law to determine how you should proceed. If one party is buying out the other, you need to do a sale of the interest and properly notate it. Make sure that this information is proper and understood by all parties. It is also wise to talk with an accountant at this time, so you can clean up your books and file any tax documents you might need to.
As far as tax consequences for dissolving a partnership, there usually are none. However, you will need to account for the business-owned property that has appreciated in value and payment of business and employer taxes. Upon filing your final tax return, you must inform the tax authorities that you are no longer in said business relationship.
As with ending a marriage, ending a business partnership can be just as complicated, contentious and messy. Which is why it is very important and preferable to have a partnership agreement in place that details an exit strategy, and when one doesn’t exist, a skilled business attorney can help you through the complicated process.
If you would like to set up a business agreement with a partner or partners, or need help going through a dissolvement of a partnership, reach out to us at The Weil Law Group either by phone (954) 603-7603, by email at Jacob@theweillawgroup.com, or visit our website at WeilFL.com. We are here to help!
This content was created by:
Jacob A Weil, ESQ., EA, LCAM
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