Breaking up with a business partner is a lot like going through a divorce. Learn how to do it quickly but with integrity, protecting your business and investors along the way.
Business partners all go into business with the best of intentions. They want to work together in a collaborative way to build something that’s lucrative and professionally fulfilling.
But personal and professional priorities can change at any time. One business partner may want to move to another city, change career objectives or retire. Or economics may force partners to break up when the business can no longer make payroll in a reliable way.
What’s the fastest way to end a business partnership? Ironically, it’s to slow down and avoid making breakup announcements in haste or anger. Here are six action steps that can help minority or majority business partners minimize administrative surprises and needless angst during a business breakup.
1. Phone a friend. Your first call for help in unwinding a business partnership doesn’t have to be to a lawyer. Rather, it may be more advantageous to call a business-savvy colleague or mentor who won’t charge $300 per hour for emotional support and tactical wisdom. Find at least one person who can ask thoughtful questions and provide an “equitable” rather than “adversarial” tone to the conversation.
2. Reread key documents. A partnership agreement is just one document that may influence business split negotiations. Other documents that may have some bearing on the ease and expense associated with a business breakup include employment agreements, debt agreements with personal guarantees, real estate lease agreements, and the company’s organization documents outlining shareholder and board of director notice requirements and voting procedures. Read before taking action.
3. Double-check IP ownership. Today, intellectual property such as patents, copyrights and trademarks may be a company’s primary asset. Tread cautiously if your business partner is listed as an inventor on your company’s patents but never officially assigned the rights to the invention to the business entity. Also, watch out for expenses that may have been paid directly by the soon-to-be-ousted partner but never reimbursed by the company. For example, is your company’s domain registered to your company or to your business partner?
4. Limit financial exposure. The prudent approach to a business breakup is to explore all the ways a resentful business partner can potentially incur debt or other obligations on behalf of a company. Consider closing or capping credit lines until business ownership issues are settled.
5. Plan the announcement. Few small businesses have the financial resources to survive a nasty, prolonged ownership battle. Unless blatant fraud or theft is involved, it really doesn’t matter why you want out, only that you want out. Pointing out the failings of a business partner will just make negotiations more contentious and costly.
To maintain goodwill, keep all discussions confidential. It’s not an appropriate subject for Twitter, Facebook or LinkedIn. Your partner should hear about the split from you, not other employees. Invite a nonthreatening, independent businessperson or independent board member to attend a meeting to discuss your decision to end the business partnership. This person should lead the meeting and discuss the administrative process of ending the partnership.
6. Document the agreement. Hire a lawyer to prepare negotiated agreements and any related purchase or sale of securities documents. Lawyers generally advise business partners to keep corporations intact for a couple of years even if the base business is no longer active. Once a corporation is closed, all prior protections for directors and officers usually go away too.
Finally, keep in mind that sometimes the fastest and least expensive way to end a business partnership is to be generous. Trying to get the upper hand of every business negotiation can undermine employee morale, prolong vendor uncertainty, and allow competitors to advance while your business remains in limbo.