Issues with Your Business Partner?
Entering into a venture with a business partner as co-owners can be a very rewarding venture, both financially and personally.
In the beginning, things usually start out great. There is a mutually beneficial relationship built upon a shared vision and goals. Typically, partners envision a long and successful partnership.
But a business relationship, like any relationship, can often be complicated. Especially after the honeymoon period. Furthermore, if there are more than two partners involved, this can lead to even more problems.
It’s inevitable that over time each partner’s goals, expectations and timelines will change.
Due to all these variables, it’s essential to have a plan for the potential exit of business partners. Maybe the exit is voluntary, or perhaps it's not.
The end goal is to make sure that if any partners were to leave, that the company ultimately can still be successful going forward.
Here are some tips to successfully handle business transactions with your business partner:
Think About Your End-Game From The Beginning
As an owner, you should always begin with the end clearly in mind. This means coming up with various scenarios where you could leave the business in an orderly fashion, whilst maximising the value of your investment.
Also, having an end-game helps to:
• Ensure strategic decisions are aligned with the big picture
• Structure a growth strategy that provides some flexibility
• Achieve long-term goals that are aligned with the overall business plan
Buy-Sell Shareholder Agreements
From the business outset, it’s critical to put a shareholder agreement in place when there is more than one business partner or shareholder.
Make sure to consult your lawyer. The agreement should lay out clear expectations. It will also help mitigate the potential emotional, legal, or financial issues. Even if it's hard to imagine now, these issues may surface if the business partnership was to end.
A shareholder agreement:
• Should document the initial business valuation
• Defines the methodology for valuing the business value in the future
• Lays out events which will trigger a departure of a partnership or shareholder. Including death, termination disability, bankruptcy, divorce etc
• Structures financial terms of a partner/shareholder buy-out.
It’s strongly recommended to review the agreement as part of the company’s end of year process to make sure it is still relevant and up to date.
By collaborating on the agreement, it provides owners with an excellent opportunity to work out how they would like to exit their business. Would you prefer to sell your business to an external buyer or to transition to your family or fundamental employees?
When Things Go Wrong - Contingency Planning
Things can go wrong at any moment. A pandemic, sudden death, illness, or disability of a business partner can instantly have a disastrous effect on your business, and leave the future in doubt.
By creating a contingency plan, it helps both you and your colleagues to prepare for an emergency, as well as being able to react rationally.
Generally, a Business Contingency Plan should include:
• An outline of the key requirements of the shareholders
• Who should run the business in the event the current leaders are incapacitated
• Contact details of advisors who can assist the owner’s family who need to make crucial decisions. Including an attorney, CPA, business broker, wealth advisor, business transition specialist, and more
• A list of potential buyers if the business was to be sold (both internal and external)
• The policy details of your insurance
• Where all of your important business documents are located. Including - Corporate Records, Operating Agreements, Shareholder Agreement, Financial Statements, Business Ownership Transition Plan, and Tax Returns.
Are You Covered For Life Insurance?
Having life insurance in the event of death or disability provides a ‘backup plan’ for the owners and their families. It provides them with time to work out the best way to move forward, both personally and for the business.
Life insurance provides:
• Business continuity
• Money to keep the business running smoothly in the owner’s absence
• The company/co-owners to acquire a deceased or disabled owner’s share
• Immediate liquidity
You may have a well-written buy-sell agreement, but it’s still essential to ensure that a buyout can be funded. Otherwise, it will likely lead to financial disaster for any partner(s) who remain, and lead the company into a downward spiral.
It’s recommended to consult with a life insurance expert to consider the best life insurance policy for you. It’s also critical to get your estate planning in place to ensure you protect what’s important, your family and your personal assets.
What To Negotiate
It’s challenging at the best of times trying to maintain partnerships while the business grows. But when a partner exit’s the company, that’s when it gets truly tricky to negotiate successfully. It’s quite difficult to separate emotion from business transactions. It's even more difficult when making plans to end a partnership.
It’s strongly recommended to hire an independent advisor who isn’t emotionally invested and can provide objective advice. An advisor helps guide partners through the discovery and decision-making process, allowing for an effective plan to be created.
Now that you have a solid foundation with a buy/sell agreement, there is still more which needs to be negotiated.
Figuring out who is going to take over a partner’s responsibilities is very important. So is creating a timeline for the partner’s transition out of the company.
How To Keep The Peace
If you have co-owners, then planning for an exit is crucial for many reasons:
• For partners to maintain personal relationships
• To ensure everyone gets a fair deal
• To ensure business continuity
To avoid any unpleasant and awkward experiences, it’s critical to document a plan. Also working with professional and experienced third-party advisors can help craft the perfect exit strategy and buy-sell agreement to suit all your needs. A plan allows partners to think about the discovery and decision-making process. While also putting in place a practical plan.
By working with advisors, they are not only able to provide guidance throughout the transition process. They can also help ease the emotional and challenging negotiation process.
Creating a Business Ownership Transition Plan which outlines long-term exit strategies, helps to guide your business growth strategies. This is a crucial step in making sure that all the owners’ goals can be achieved.
Having a healthy and profitable company means you’re more likely able to fund multiple owners.
While it’s recommended to have an exit plan from the outset, it’s never too late to develop a business strategy to help deal with a partner’s departure from the business.
Thoroughly planning a partnership transition takes a lot of time. It’s recommended to start the process as soon as possible which gives you extensive time to deal and prepare for a business partner’s departure. Otherwise, you may one day be blind sighted and unprepared.
A well-prepared plan greatly improves the chance of a successful transition for all owners.
How we help business owners
At Exit Advisory Group, we help entrepreneurs successfully grow and exit their business. We can help you:
Speak to an Expert on our team to understand more
At Exit Advisory Group we help entrepreneurs maximise company value and exit at the top of their game.
We do this by giving business owners the tools and strategies to design more profitable, efficient and enjoyable businesses to own - that are also less dependent on them. When they choose to exit, they are in the best position to unlock the wealth in their business and be rewarded for their hard work.
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