When starting a new business together, business partners are brimming with excitement about the possibilities that the new venture may bring. There is a collective air of anticipation like a team in the locker room getting ready to head out for the “big game.” The last thing new business partners think about as they launch their new venture is what will happen when the day comes when the partnership ends.
But the truth is that eventually every business partnership will come to an end. It may come earlier than the partners expect, due to fundamental and irreconcilable business disagreements. Or maybe because one of the partners simply has lost a passion for the business and decides it is time to pursue a new career direction.
Dysfunctional partnerships are a major source of business failure, whether it is the result of open conflict or because a partner has lost heart. They suck energy and time away from building the business and often can lead to the failure of what was otherwise a perfectly good business model.
Even if the partners have both a great business and personal relationship, the partnership eventually will come to a natural end. Perhaps one of the partners is ready to retire before the other partner. Or perhaps the partnership finds its ultimate end due to the death or disability of one of the partners.
Whatever the reason, there needs to be a clear agreement on the rules that govern the ending of a partnership. You will most likely spend more time with your business partners than with anyone else – even your family. And it will be a relationship that can be even more complicated to leave of than a marriage.
The best time to set up an agreement that will govern the ending of the partnership is when you first start-up the business. At this point in time there is little to squabble over. The business exists only on paper and it has no real value, so finding a fair way to deal with an exiting partner is much easier.
While it is never too late to set up a partnership agreement, the longer you wait the more complex and expensive it can get. Once there is real value in the business it gets much harder to find agreement on how to structure the potential exit of one of the partners.
The best approach is to develop a framework that all partners agree on. It should include circumstances for a partner leaving (both voluntary and involuntary), mechanisms on how the exit will happen, a clear formula on how the business will be valued, and plans for funding the buy-out.
Once the partners develop the structure of their agreement, it should then get formalized by an attorney. While partnership agreements cost money to create, it will cost you much, much more in legal fees to disentangle a business partnership that has no partnership agreement in place.
When developing a partnership agreement follow the “golden rule.” Think about how you want to be treated if you are the one to leave.