Seek first an exit strategy

by The City Wire staff ([email protected]) 73 views 

I recently heard an attorney say 70% of partnerships end in “divorce.”

She didn’t give her source for the 70% statistic, but from my own observations, the majority of partnerships end due to disagreement between the partners. For clarification, when I say partnerships in this context, I mean any business arrangement with more than one owner active in the management of day to day operations.

Most partnerships first begin with a friendship between the partners. Friends begin sharing their dream of owning a business. Soon they get excited enough to pull the trigger and start a business. They don’t consider there could be a time when they have differences. But disputes among business partners are a fact of life. Another fact of life is these disputes between partners cause many partnerships to end at great cost to the partners.

If you are considering  starting or acquiring a business a partner (even your spouse or significant other), consider this advice. Look at your future partner and ask yourself these questions, “What if this person changes into a great big horse’s hind end? What can I do about it?”

I counsel every client who plans to start or buy a business with a partner to plan their divorce or separation first. This may seem harsh, but it is prudent. An exit strategy should be thought through with any assumptions  or formulas tested. Recently a business partnership described their exit strategy and how to pay the other partner his “fair share” only to find their formula was easily manipulated.

For a business without a majority owner or a tie breaker vote, it is crucial to devise a process or method to settle differences of opinion between the partners even if it means flipping a coin.

Many business partnerships start to fall apart when one partner feels they are doing the great majority of the work and has to share the rewards of their work with the other partner. Resentment grows toward the other partner as well as lack of respect. The other partner returns this resentment and lack of respect. Small disagreements become exaggerated. Without an agreed upon procedure to settle these disagreements, important decisions aren’t made timely and the business’ profitability and value suffers.

Before the business begins, most differences can be avoided by agreement between the partners as to each partner’s responsibilities and authority. Decisions to spend or borrow large sums of money or that affect sensitive business relationships should require a unanimous or majority partner vote, but don’t fail to define what you mean by large or sensitive transactions.

Absolutely the most important action business partners can do? The agreement among partners must be in writing. Memory is defective.

Planning an exit strategy, deciding how to settle disputes, and reducing the partners’ agreement to writing are just a few of the important decisions prudent business partners make. There are many more decisions that must be made on the front end of a business arrangement to reap a profitable back end.

A lot of wealth has been destroyed by business partnerships ending badly along with the friendships which motivated the parties to start their business. If there was ever a circumstance to seek counsel before starting a business, starting a business with a partner is that circumstance. If you ever consider entering into a partnership, seek advice from an experienced CPA, an experienced attorney, and experienced business owners that you respect.

Business ownership is still one of the most dependable paths to a good life. Working with great partners can be synergistic and profitable. On the other end of the spectrum, a bad partner can be a nightmare.

Choosing to own a business is a great life choice, unless you choose the wrong partner without an exit plan. That could be a nightmare.