A few years ago, I wrote a newsletter about the pitfalls of partners in business and how to make sure you don’t find yourself in a bad place with your partner(s).
Since then, we’ve had many client partnerships break up, some OK, but most in a bad way. A few have ended up in lawsuits we’ve been subpoenaed for to provide evidence!
So it seemed like time for a refresher on this. If you are in a partnership right now, and things are going well, then stop right now and figure out how you can break up if you ever wanted to without having to get in a fight about it.
If things are already a little rocky, stop now and figure out how you can break up if that’s the way it goes right now, before it gets worse.
If you’re currently in a fight with your partner and it’s headed for a split, at least try to stay out of court and keep a level head.
The problem with partnerships is they seem great when you’re just getting going and full of optimism, and everyone is picking out yacht colors. And since they seem great, no one wants to talk about how you’ll pull it all apart if someone wants out before the other person. It almost seems like you’d be jinxing it if you talk about splitting up before you even get going.
If you can’t talk about it now, though, while you’re all still friends and no one has anything to lose yet, how well do you think it will go when you’re six figures and thousands of hours in and can hardly stand the sight of each other? Yeah, about as well as you’d think.
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What you should have- insist on- is a very specific, no gray area, iron-clad agreement on what you will do if one of you wants out before the other one.
Because I keep seeing, over and over, what happens when you don’t have that. One partner wants to stay and keep going and build, and the other partner wants out for an amount of money no sane person could ever justify for their share.
And if they don’t get it, then they force a sale. Or liquidation. Or a court fight. And in all cases, everyone involved loses everything except a deep regret for ever having started together in the first place.
Therefore, to avoid that, you have to have an agreement that spells out exactly what the steps are for one person to quit and give their ownership back. It needs to have a very simple formula (or even just an amount) for what they get and when they get it. That does NOT have to be what they put in- it will be less until you’re years down the road. It may get paid over time. If it is an amount that destroys the business to pay, then it’s the wrong amount.
The amount doesn’t really change from the start to when it happens, but people’s ability to accept the amount changes. Once a partner wants out, they often want their entire original investment (which may still be a long way from being recouped) along with some return on that investment and even some additional amount for the “future profits” they are giving up to the person staying, even though they want no part in actually working to earn those.
But that same partner, if offered a much smaller buyout amount as part of even starting the business might not blink an eye at that point. In fact, it can seem like a part of the reason they’d be more motivated to stay and make it work.
Imagine a scenario where two friends each agree to put in $50K to start a business. Like geniuses, they also pre-agree to an exit plan like this:
- If either partner wants to quit in the first 6 months, they get $0 back
- If they quit between 7-18 months, they get $10K for their full share
- If they quit between 19-36 months, they get $25K for their full share
- If they quit after 36 months, they get their full investment back, paid in two equal installments 4 months apart
- If they quit after five years, they get half the full market value of the business
Now imagine they don’t have any agreement, and 18 months in, one partner wants out. He looks over the business and decides he wants his full original investment back, half the cash in the bank, half the value of the equipment they’ve bought, and half the profits for the next 12 months. And this is for a business that has yet to earn enough profit to even pay either partner a salary.
This demand, even if negotiated down by half, is enough to completely kill the business. Because not only can the business not afford to part with this much cash, it will also now have to hire someone to take over one partner’s workload (a partner who was working for free).
I can’t stress this strongly enough (although I know very few of the right people are going to listen), if you are in or considering a partnership. Write down exactly how a partner can exit and what they get if they do (and it should way less than you think).
If you don’t plan ahead, and it happens, an otherwise good business with a good future can be completely ruined. It literally happens all the time. But there is no reason it has to happen to you.