In the beginning, a business relationship can be a lot like a romantic relationship, if you take out the….well, I am sure you know which part I am talking about. You meet someone or a group of someone’s, who truly understand your ideas, your vision and all the good things you have to offer, and you want to spend lots of time with them, building a (professional) life together and nurturing the growth of a business together.
Of course, petty quarrels may spring up occasionally, but in the beginning, it is all about passion and excitement. Over time, the excitement fades, and you and your business partner get to know one another on a deeper level and everything rolls along comfortably.
Then, sometimes, out of the blue or over a long period of time, the relationship changes. Complaints start becoming more frequent, or communications more sparse. Rows may spring up about how the business is run or the way profits are shared.
Gradually, the rot begins to sink in and, unless drastic action is taken, you and your business partner are heading towards ‘splitsville’.
If things have already escalated to the point that you know you need to exit the arrangement, then carry on reading and discover the secrets of ending a business partnership in the most amicable way possible whilst ensuring your reputation and finances remain intact.
It’s Not You, It’s Me (code for “Actually, it’s you”)
Business partnerships can dissolve for a number of reasons; however, the most common are:
One partner cannot handle the ups and downs of owning a business
Growing a new venture is tough, especially in the early days when you may not be making much money. Often business partnerships implode due to one partner being unable to deal with the stress that comes with working long hours and often for very little financial return, especially in the early days.
You do not diversify your skills enough and end up stepping on each other’s toes
You know the old saying about “too many cooks…”. If you and your business partner both try to do the marketing, sales, production, etc., things are likely to get heated and then explode. The reason? In a partnership, neither of you work for one another. Therefore, if one of you tries to give the other orders, like you would an employee, resentment will quickly develop. The best partner relationships are created by strictly segregating roles from the beginning of the business venture.
You both have different values
If you and your business partner do not share the same beliefs and values, at the risk of sounding pessimistic, your partnership is likely to fail at some point. For example, if one partner is committed to delivering quality service, and the other just wants to get as many sales as possible for minimal effort, disputes will likely occur on a regular basis.
The End of the Affair
To break up with your business partner in the most amicable way possible, you need to take two specific steps. And yes, one of these steps involves actually confronting your partner. But first, you must look at your Partnership Agreement.
You do have one, right?
Dissolving a Partnership where there is a Partnership Agreement in Place
Once you have decided to end your partnership, you need to investigate the terms for doing so under the partnership agreement. If your partnership agreement was drafted well, it will contain clauses detailing the triggers that may lead to the dissolution of the partnership and even the procedure to be followed to save and if all else fails, terminate the partnership.
Not only will a good partnership agreement detail the procedure to end the partnership, it will also set out a disputes resolution process, which, if followed, may end up resolving the dispute and saving the relationship.
If dissolution is inevitable, the partnership agreement should set out how assets and liabilities are to be divided and how trading is to be wound up.
Dissolving a Partnership where there is no Partnership Agreement in Place
If there is no Partnership Agreement in place, the first thing you must do is cease trading under the current business name.
The dissolution of partnerships where there is no partnership agreement in place will be governed by the Partnership Act 1890 (the Act). Under the Act, the default position is that, without an agreement to the contrary, any one of the partners may issue notice dissolving the partnership and no minimum notice period is required.
With regards to the distribution of assets and liabilities on dissolution, the Act sets out the required steps to take, which can be summarised as follows:
- All debts and liabilities of the partnership must be paid
- Payment of advances made by partners to the partnership must then be repaid
- Any capital due to the partners is paid
- After these have been paid, anything left is divided between the partners according to percentage of profits they are due.
If there are only losses then all partners must contribute towards those in accordance with their profit share percentages.
If this does not frighten you into ensuring that you have a partnership agreement in place for any future ventures, then maybe this will – the Act provides no form of restrictive covenant on an outgoing partner. Therefore, there is nothing expressly written into the partnership agreement to stop them poaching all the partnership clients and setting up in direct completion with you, across the street.
“We Need To Talk” – Confronting Your Business Partner
Once you decide to exit your business partnership, and regardless of whether or not you have a partnership agreement in place, you need to obtain legal advice. This is to ensure the terms of any existing agreements are adhered to and you are paid all the monies owed to you.
Decisions will have to be made as to whether you buy your partner out of the partnership and continue trading or wind up completely.
Whatever decision you make, it is in your best interests to ask for a confidentiality agreement to be signed between you and your former partner, to prevent details of the split tainting any future business ventures you wish to engage in.
Moving On
As is the case with a love affair, the end of a business relationship can be bitter, bloody and painful for all involved. However, if handled correctly, all parties can move on to brighter and better futures.
Saracens Solicitors are a law firm based in central London and are experts in the field of partnership and corporate law. To make an appointment with one of our corporate law team, please phone us on 020 3588 3500.
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