Legal Advice · 5 April 2021

How to end a business partnership on good terms?

How to end a business partnership on good terms?

Millions of entrepreneurs who take the bull by the horns and start up their own business usually do this solo. This is a tough way to go about business with everything requiring your attention, or it will not get done.

You might even have started out solo and have realised it’s time to get someone to share the load. There are many advantages to adding someone else to your new or established business model. There are advantages such as being a sounding board for each other over decision-making, sharing the load of responsibilities, complementing each other’s strengths and weaknesses, learning from each other’s successes, reducing the individual’s level of financial commitment, always having someone in your corner and having a partner with which to celebrate the business moments of success.

These advantages may sound euphoric and, indeed, there is good reason to be happy if you find a suitable business partner. It is prudent, however, to not go into a partnership naively or with blinkers on. Circumstances, people and environments change either for short bursts or long term. You will most likely have strong disagreements, which a healthy partnership should withstand and value as it makes for a robust business. It is a problem, however, when things turn to bitterness and acrimony.

It is precisely for those times that you must, in your euphoric start-up mood, still be grounded and set everything out in a formal document. You can start with a Heads Of Terms which is advisable as the two or more partners can thrash out the partnership’s details and bring it to the point of legal readiness. The details of the dissolution of the partnership should be fleshed out as well, including the rights of each partner. When this document is then handed over to a lawyer to formalise, your legal costs will be significantly lower as all the decisions are pre-made and there is no toing and froing.

The lawyer can then produce a partnership agreement or shareholders’ agreement. This will be the difference, financially and emotionally, between a successful split and a disastrous split in the partnership.

What happens if a partner wants to leave the partnership?

When a partner wants to leave a partnership, the steps necessary should not be unclear or a surprise. The agreement that was put together should be clear about what it is each partner can expect from the business and the other partners. When you were creating those Heads Of Terms, these issues should have been discussed openly and maturely during a non-confrontational period of the relationship. The outcome achieved would be a fair agreement on what you are seeking from the business, short term, long term and at a time of splitting.

But then the time comes when you might notice the following behaviour in your partner or yourself. One of the partners feels like they are doing more than their fair share of the work.  This is a common occurrence and often is the case when a Head Of Terms hasn’t been established. Perhaps the one partner expected to do the less tangible ‘heavy lifting’ because they are the visionary and spend many hours in creative, deep thought?

Does one of the partners think that the company’s big success is largely all thanks to their input into the business? What if a negative has happened, for example, there is a sudden loss in business with a big impact on turnover? Are the partners pointing fingers at each other?

Have you or the other business partner or director lost interest in the business because of disillusionment or another interest in a separate company that performs much better?

Are meetings or discussions with your business partner seldom productive? Instead, do they end up in disagreements with the compromise being deeply unattractive? These will occur in any business. It is the frequency that needs to be watched.

Has a disruptive or devastating event happened in the lives of one of the partners’ personal lives, such as illness (a pertinent topic in 2020/2021), divorce, death or an addiction? Is this personal life factor having a tangible effect on their workplace performance or on the employees’ happiness and/or performance?

Is the future direction of the business no longer as you and your partner foresaw it? Do you or your partner believe it has morphed into something else and is one of the partners opposed to this ‘new’ future direction? Was the future direction of the business written into the Heads Of Terms?

If you are experiencing these situations, it would be prudent for you to step up to the plate and take control. Your business partner, or partners, may not be seeing the growth in problems or the perception of problems. If you take control and sincerely address it, it might be early enough that there may be an opportunity to take action collectively.

As mentioned above, perhaps the different business partners had a different view of their roles, now or in the future, but this was not documented in the Heads Of Terms or, more simply, in clearly defined job description documents. It was based on everyone rolling up their sleeves and getting stuck in. If this is the case, then corrective action could be successfully done via a review of what each of you is doing daily. Then it should be compared to what each of you WANT to be doing on a daily basis. Hopefully, you can agree on this and then document these job descriptions. This could reveal if more heavy lifting is being done by one person or reveal any misunderstandings in a non-confrontational way. If additional help is needed, get a senior business consultant in to act as a mediator. The important thing is getting everything out in the open, all the cards on the table, and work through to a solution that leaves no bitterness.

Set a timeframe for this resolution exercise so that it doesn’t drag on for years. If this fails and a resolution cannot be reached within that mutually agreed timeframe. It might be time for a completely different decision. For instance, whether the partnership is still viable.

In most circumstances, the business gets formally evaluated by a third party first, and this value is agreed upon. Then the partner that is leaving is bought out by the partner or partners that are staying.

How do you dissolve a 50/50 partnership?

A buyout is not always what the other partner wants. There is also a “winding up” of a partnership which is a different process to partnership dissolution. There are frequently technical dissolutions of partnerships. This means that the partnership ends due to a partner retiring, a partner passing away, or the partnership’s actual composition needs to change. However, the business continues as normal.

In the case of a general dissolution, a partnership comes to an end, and the partnership obligations are settled as a priority. This means servicing debt to creditors with HMRC always first in line as well as the remaining partners.

They may wish to continue trading. You may have to investigate whether the business can be portioned up in a way that allows it to continue as separate entities. If two new entities are formed as the outcome, with each of the former partners owning 100% of their own new entity, tax efficiency should be considered in this restructuring. Don’t rush to the end just for the sake of splitting. This process can be quite a bit more complex if the business under discussion is, in fact, a limited company with directors, not a straight partnership structure.

Added to this, the dividing lines can be difficult to ‘draw’ if, for example, it is not a simple split of sales and production but rather the split of a coffee shop, an SEO agency, a laundromat, etc.  What are the distinct elements, and how are they going to be split?

In some cases, separation involves non-physical assets, for example, the rights to intellectual property, artwork, brand name or a social media following. This will have to be carefully accounted for in the financial settlement. This can be done by either the rights being assigned to one business (i.e. one ex-business partner) as a separate entity. If this isn’t viable, an agreement could be reached whereby the one ex-business partner agrees to pay the other ex-business partner a royalty. This could, for example, be calculated based on future earnings from their share of ownership of the intellectual property. If the asset is, for example, some software or a technology platform, then the agreement could be that they receive a payment equal to 5% of all revenues generated from using that tool.

It is important to note: if there was a failure to have a legally binding partnership agreement put in place, any party could serve a notice to dissolve a partnership and fight for rights to assets will be messy.

Dissolving a partnership can also be challenging if the business and the partners have financial troubles. If, however, it is a simple parting of ways, then according to the Partnership Act of 1890, you must stop trading immediately under your current business name.

Next, all transactions should be dealt with according to the percentage of shares you each hold in the venture, whether 50/50, 70/30 etc. This will be considered when paying creditors and collecting from debtors. Debtors and creditors should be notified immediately of the imminent dissolution process. No further business can be conducted under the current legal entity.

There will also be a requirement to file for partnership dissolution. Tax is treated in different ways based on whether it is a technical or general dissolution. The latter would be wound up and stop trading. In a technical dissolution, with one partner still trading under the same name after a buyout, taxes and other financial issues can be disputed with lots of legal costs and court appearances if it is not amicable.

There are a lot of legal regulations to comply with for asset liquidation, method of payouts to creditors, debt collection and division of remaining profits. It would be prudent to get help from an insolvency specialist to ensure full compliance and no legal comebacks.

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