Dr Jeff Cornwall

When starting a new business, entrepreneurs are often brimming with excitement about the possibilities a new venture may bring. If the entrepreneur has partners, there is a collective air of anticipation, like a team in the locker room getting ready for the big game.

The last thing these entrepreneurs are thinking about is what will happen when the partnership ends. Remember this: Although you and your partners get along great as you set up your business, things can change. Partners may need to part ways for any number of reasons: One partner wants to retire; another partner is just ready to go in a new direction; fundamental business disagreements flare up; or the company must deal with the death or disability of one of the partners.

Whatever the reason, the rules of a partnership breakup require a clear understanding of how and under what circumstances the partner can leave, and of what that departure will cost the remaining partners.

Clear buy-sell language needs to be a fundamental part of any partnership agreement because it sets up the rules for the inevitable departure of one or more of the key owners.

The best time to set up a partnership agreement is when you start up the business. At this point, there is little to squabble over. The business exists only on paper, so finding a fair way to deal with an exiting partner is much easier.

While it’s 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 agree on how to structure the potential exit of one of the partners.

The best approach is to develop a framework everyone can agree on. It should include circumstances for a partner leaving (both voluntarily and involuntarily), mechanisms on how the exit will happen, a clear formula on how the business will be valued and plans for funding the buyout.

Do unto other partners …

Think about how you’d want to be treated if you were the one to leave. Too many entrepreneurs assume that they will be the last one in the business, and they try to find ways to “stick it to the other partners” if they leave first. This is the classic situation in which you should “do unto others as you would have them do unto you.”

Once the partners develop the structure of their agreement, get it formalized by an attorney. While partnership agreements cost money to create, it will cost you much more in legal fees to disentangle a business partnership that has no such agreement in place.

The death of a partner is best addressed using a buy-sell agreement funded with life insurance policies. This offers a pre-funded way of ensuring that the deceased partner’s estate does not become the new partner by default. It also puts in place a mechanism to make sure the deceased partner’s family is taken care of fairly.

These are difficult subjects to talk about, but the end of a partnership is one of the most important issues to plan for in a new business that has more than one owner.

(This post ran in today’s Tennessean).