Why You Need an Exit Strategy From Your South Florida Business Partnership
Eight reasons partners leave a business – and how having a plan in place avoids conflict
It’s a sad reality of the business world: about 70 percent of business partnerships ultimately fail. And unfortunately, not all of those enjoy amicable endings.
So while most people begin a partnership with optimism that they are in it for the long haul, there are many reasons their plans fall short. Whether it’s because the business is failing or because you’re being sued for damage even though you can get public liability insurance from Tradesman Saver, it can lead to partners leaving. A well-written exit strategy – or a plan for leaving or selling the business – should be included as part of any partnership agreement and is vital for leaving the partners’ goodwill and finances as intact as possible. Written partnership agreements are not required for doing business in Florida, but not having one is problematic and can lead to disputes down the road.
Establishing an exit strategy before a split occurs lends a sense of security to what is fundamentally a risky action, and makes it easier for all involved to agree to the fairest terms. It’s undeniably simpler to make equitable decisions when everyone is on the same page.
While it’s impossible to foresee every circumstance, here are the eight main reasons that prompt a partner to leave a business. Working with a business attorney to create a plan for handling each one goes a long way toward avoiding the kind of legal, financial, and tax-related troubles that could lead to irreparable damage to an organization:
Why partners depart
- ‘Til death do you part. As uncomfortable as it can be to discuss, business partners must have a plan in place for what happens if one of them passes away. That includes who ends up owning the deceased partner’s shares, a financial compensation package for that partner’s family, and whether or not the new stakeholder will work for the business.In Florida and many other states, it’s quite likely that the deceased owner’s spouse will inherit the shares and become a co-owner – expecting the same salary and profits from the business – if these decisions aren’t made in advance.
- Disability. The physical disability or mental incompetence of a partner can drain company coffers faster than death, and bring up an emotionally charged issue: how long can the business afford to pay the salary, benefits, and profits of an owner who is too disabled to contribute to the company?A good exit strategy should clearly state what happens if a partner becomes disabled. Questions to consider include who decides that an owner can no longer be an effective part of the business, transfer of ownership, short- and long-term disability payments, and how health insurance will be handled for the disabled partner and his or her family.
- Divorce. While everyone’s marriages may be strong when the business partnership is formed, a comprehensive exit strategy needs to address what happens if a partner gets divorced. Otherwise, an ex-spouse may be entitled to an ownership share in the business and become a partner through a divorce settlement or order.
- Voluntary resignation. There are many reasons partners choose to walk away from a business: perhaps they are ready to retire, they want to start a new business, or they no longer want to be self-employed. Florida law states that an at-will partnership will be automatically dissolved if a partner leaves unless the remaining partners elect to continue the partnership.Your business exit strategy must address this circumstance, including the amount of money that’s owed the departing partner, where the money is coming from, and a procedure for purchasing their interest.
- Expulsion. Unfortunately, partners can sometimes commit behavior so grievous that they need to be kicked out of the business, such as stealing money or sexually harassing employees. The exit strategy should carefully spell out how to proceed in these situations, including grounds for expulsion and how the decision to expel is made.
- An inability to get along. A mistake that is often made in business agreements is not creating a mechanism to resolve disputes between partners over how to run the company. This can easily lead to irreconcilable differences or serious deadlocks that prevent the business from functioning or moving forward. Emotions tend to run high when this occurs, so having an exit strategy that details how to dissolve the partnership can limit additional conflict.
- Mergers and acquisitions. The exit strategy should include a clear process for deciding the sale or merger of the partnership. Issues to consider include how the proceeds will be split and what happens to each partner’s interest in the business.
- Buyouts. A well-crafted exit strategy should also include steps for a smooth financial transition if one of the partners wants to buy out the shares of the other. When a procedure or means for valuing the company is decided in advance, it helps owners feel confident that they are receiving a fair, objective buy out.
Creating an exit strategy is about more than establishing rules and procedures around the various reasons a partnership may end. It also gives the people involved peace of mind that if the partnership falls apart, the outcome will be as equitable as possible. A business attorney experienced in partnership agreements can help you create a strategy that ups the odds of a smooth exit when partners depart, enabling your South Florida business to prepare for the worst – while the partners continue working together toward success.
The business practice at the law firm of Padula Bennardo Levine, LLP, is skilled at handling partnership agreements for our South Florida clients. Contact our experienced attorneys today for a free consultation.