Breaking Up is Hard to Do: Plan for the Successful End of a Business Partnership

People form business relationships with the best of intentions. However, when forming a new business, often they are more excited about getting into the business and doing “it” than anything else. Of course, the last thing they think about are the legal details. That can be a real danger. Left ignored, details that seem tiresome or unimportant at the outset lead to big problems later—and can even destroy a business. The stress of battling a partner over details and issues no one considered ahead of time is enormous. It is better to plan ahead.

First, when selecting a business partner, think carefully and choose wisely. Do you even need a partner? Maybe not. If you do, that person should bring something substantial to the table—like deep pockets or industry connections. Before entering into any partnership, do some due diligence. It might be awkward, but even if you get along fine, ask for financial statements and a resume that includes the names and phone numbers of past investment partners.

Be sure to select someone who complements, rather than mirrors, your own skills. However, while complementary skills and a shared vision are a good starting point, you should never underestimate the importance of actually liking your partner.

Then, get down to the nitty-gritty: hire a lawyer and form a legal entity. The legal process forces partners to face tough issues right at the outset. Legal documents will clearly define the specific roles each partner is expected to play, as well as address other issues; like how to bring in another partner or drum up additional financing. Divide business roles according to each individual’s strengths. It may seem logical and fair to split ownership into equal 50% shares, but this ownership structure can impair decision-making in the future. Instead of having decisions stalemated by a disagreement, consider a 49% – 51% split.

Discuss possible exit strategies. It seems counterintuitive, but the best time to begin exploring how to end a business partnership is at the outset. Of course, in a perfect world, all partnerships would last until all of the parties involved are ready to sell, merge or otherwise move on to new things. It is seldom that simple. The more likely scenario is that one partner will end up buying out the other, so it’s wise to put a buy-sell agreement in writing by which partners agree in advance that should a dispute arise later on, one partner can buy out the other.

For a partnership to be successful, all parties involved must agree on the same strategic direction of the company. A winning business partnership capitalizes on the strengths and skills of each partner. A strong business partnership is built on an open, communicative relationship. Meet on a monthly basis to share grievances, review roles and provide constructive criticism.

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