Last Update: February 7, 2014
Surviving a business breakup is tough. Especially when you don’t have access to information and resources to help you navigate muddied waters. Ben and Jerry made things work … but what happens when your business partnership is a bust? Should you cry a river, build a bridge and get over it or take no prisoners? They say, “What doesn’t make you bitter makes you better.” But, how do you deal when a business partner exits early or when a partnership doesn’t “set sail?”
“My business partner was also my best friend, so splitting up was not only difficult on my business, but emotionally as well,” says George Burke, CEO and Founder at BookSwim.com Book Rental Club. “People do grow and move on, so realize from the get-go that a business partnership will not last forever. One may opt for a job, start a family, or simply get bored and not pull his or her weight. In fact, plan on it ending someday.”
Burke’s story is all too familiar.
Admittedly, business breakups are hard to do, so we’ve asked twenty-four of the nation’s top small business attorneys and entrepreneurs to share their best practices and tips on how to prepare for, manage and cope with a severed business relationship and prevent an all out war.
1. Prepare in advance.
The time to prepare for a business split is long before it happens. Entering a business partnership is like entering a marriage, but without the legal presumptions. It is important to create the business equivalent of a premarital agreement that is personal and relevant, not some form that you throw in a drawer. In the absence of such an agreement, ending a business partnership is like getting a divorce. Find collaborative lawyers and do it with the least disruptive approach that you can.
2. Keep your emotions out of it.
Don’t make the business split personal. Remove your emotions form the business decision making process. It’s a professional business decision for all parties involved and you need to do what is best for the company so it can ultimately be successful. Good things come from bad situations and you’ll discover your resolve and resourcefulness when a situation of this severity takes place. Making emotional decisions will only delay the good things that can come out of a business split and hinder your true capabilities.
3. Refer to your operating agreement.
The lack of an operating agreement has sent many budding partnerships into a death spiral that will likely end in a painful and expensive business divorce. Please know that I have many more examples like this than I do of successful partnerships. One thing all successful partnerships have in common is an operating agreement. While certain online resources can help entrepreneurs organize their entities legally, special care and consideration should be paid to the operating agreement. It is very wise to seek appropriate legal counsel as well as have healthy and lengthy discussions with your partners before you finalize this agreement.
Ken Kaufman, President & CFO at Aribex:@_KenKaufman
4. Sign a business prenup.
Unlike marriages, the separation rate for business partnerships is 100 percent. Sometimes it’s pleasant, other times it’s brutal. Make sure you have a prenup, otherwise known as a shareholders’ agreement, operating agreement or buy-sell agreement that is written by an attorney that knows your business. The deal I make with my clients is — I will stop reminding you to sign the buy-sell agreement if you promise that you’ll let me handle the litigation when you sue your partner. I’ll make a lot more money handling the litigation.
5. Have the tough conversation now.
If you are already in a business partnership, go ahead and have the uncomfortable conversation now. Tell your partner(s) that your lawyer insisted. You can address pricing and valuation by making it some multiple or some fraction of the previous 12 months’ revenue. Also, place a value on any trademarks or other intellectual property, deciding who gets to keep those and for what price.