Steps To Take When a Partner Wants To Leave the Business
If you own a business where one partner or multiple partners are involved, you need to be prepared for worst-case scenarios, including a business partner split. What happens if one partner wants to leave the partnership? Well, that obviously depends on the structure and the type of your business. Usually, at the beginning of any business partnership, all the partners envision a lifetime or at least, a long-term relationship. Unfortunately, with the passage time, numerous factors can lead to a split in the partnership. For instance, I often encounter situations where a partner wants to leave the partnership because the goals and expectations changed over a period of time. Some unforeseen incident may also result in a split in the partnership, such as injury or even death. For these reasons, a written exit strategy must be agreed upon by all partners. Unless it is in writing, if one business partner wants to leave the company, the business may be forced to immediately dissolve. Remember, when one partner is absent the responsibilities for carrying out the business activities fall on the shoulders of the other partners. For this reason, many partnership businesses have key man insurance to cover the business in case a partner becomes incapable of carrying out their responsibilities. This insurance ensures continuity of the business and prevents the other partners from inheriting a spouse beneficiary or any other beneficiary of a deceased partner through intestate succession or a will.
Legal Approach
In order to prepare yourself for a situation when your business partner wants to leave partnership, you must enter into a partnership agreement. It is always better to sign the agreement with the help of a lawyer. The agreement should contain the conditions pertaining to the dissolution of a partnership, such as whether the business will continue to operate, and what the buyout provision should be. Here it is important to mention that a formal partnership dissolves the moment one partner leaves the business. This is the reason why partners invariably convert their partnership into a written agreement, LLC or corporate entity. The LLC or corporation maintains its continuity even when a partner exists.
Substituting a Partner
If the partner who wants to exit the business doesn’t have the capital to accommodate the exit strategy, or the other partners do not wish to sell the business, you can replace a partner in the business. Basically, the other partners might think of restructuring the business by inviting a new investor into the business to replace the existing partner and buy him or her out.
Calculating Profit Margin
If you plan to sell your business when you partner leaves, the selling price would primarily depend on the profit margin. When you can show the recent profits and estimate the profit level in the upcoming years, you are most likely to know how much money your partner will receive from this sale of the business. A departing partner is entitled to a share of the profits earned until his dissociation.
Valuing the Assets
A departing partner would want the assets such as patents, trademarks, equipment, inventory, cash on hand, land, buildings etc. listed and valued. So, you need to list all the assets in order to give your partner his fair share in the business, as a dissociating partner is entitled to their share of the total assets of the company.
Calculating Capital Needs
You may not have enough money to run the business after giving the departing partner his fair share. Under such circumstances, you have to determine the operating capital that you’ll need and decide whether you have to pay the whole amount to your selling partner in one lump sum or pay him over a period of time. Just because your business doesn’t have a lot of cash on hand doesn’t mean that the partner is entitled to a lesser amount upon exiting the business.
Discussing Future Earnings
When your partner plans to leave, have a discussion with your partner about the coming years’ profits and earnings. You can use the current financial data to predict the earnings. While a departing partner is not entitled to future earnings, if the company is expecting a loss, it may be difficult to pay the departing partner what they are entitled to.
If your business partner wants to leave the business, make all the calculations and settle all the legal formalities before the partners exit the business. To know more about the legal formalities, just get in touch with the Watson Firm who will help you deal with the legal issues. You can make a call at 205.545.7278 or fill the form on this page to get started now!