How to end a bad business partnership

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If your business partnership is struggling, it will cause operational and financial problems in your business. Sometimes, you can solve the problems if you and your business partner can find time to sit down and discuss strategy. But at other times, the business partnership has no future and the only thing to do is to end the partnership. Today, we will look at how to do this in the best possible way.

6 signs that your business partnership is in trouble

According to research, up to 70% of all business partnerships fail. There are many reasons why partnerships fail, including lack of communication, lack of trust between partners, and letting business and personal life interfere with each other.

Please answer the below questions:

  • Did you and your partner agree on workload but are you now the one doing most of the work?
  • Has your business partner lost interest in the business?
  • Are you and your business partner continuously arguing about how to run the business?
  • Are there any developments in your partner’s life that are affecting their ability to contribute to the business the way they should?
  • Do you and your partner have very different ideas about the future of the business?
  • Have you lost trust in your business partner?

If you answered yes to any one of them, you need to take a serious look at your business partnership and start making the necessary changes. If possible, sit down with your business partner to solve the problem and discuss future strategy. If you cannot find a way to solve the problem, it is time for the next action.

Make changes in your business partnership agreement

Step 1 Review your partnership agreement

Your business partnership agreement is the document that contains all the important things that you and your business partner agreed on before you entered into the partnership. I am assuming you created the agreement before you started the partnership! If you receive my weekly emails, check the email I sent you last week. It contains a link to download a draft business partnership agreement that you can use.

Make sure to understand where you stand. What are your obligations? What did the two of you agree on regarding somebody wanting to end the partnership? What possibilities are there in the partnership to do so? This will determine what possibilities and limitations you have.

Step 2 Determine what you want for your business and for yourself. Write it down

If you are not satisfied with how things are going, that feeling should push you to take action. But do not take action based on your emotions. Take time to consider what you want to achieve. Consider multiple scenarios and how to deal with each of them.

For example: let us say you want to end the business partnership but also want to continue doing the same kind of business. Let us also assume that your business partnership agreement allows you to do so. Meaning there is no clause to stop you from doing this. You need to consider the scenario that your former business partner may also want to continue the same kind of business. So what do you do if your former business partner steals all the customers?

Once you know what you want to achieve, write it down to force yourself to clarify everything on paper.

Step 3 Be willing to end the business partnership if you cannot reach agreement

Maybe you decided that – if certain changes can be made – that you are willing to continue the business partnership. That is great. But there is no guarantee that your business partner will agree to make the necessary changes. At the end of the day, you need to be willing to end the business partnership. Sometimes, this may also mean that you have to walk away from the business that you spent all your time, effort, and money on. This is why it is so important to be very careful about who you choose as your business partner!

If you need to end the business partnership, there are 4 ways to consider.

4 ways to end a business partnership

1. Change the weighting of the business partnership

In this option, you do not end the partnership but you assume a majority stake in the business while your business partner takes a backseat. This is a partial buyout because you will repay part of their capital share. They continue to be a business partner but their role can be very limited. This gives you space to do what you want without having to look for money. You will need to change your partnership agreement to reflect the new situation. One reason to choose this option, is if the business partner wants to keep benefitting from the business but not interfere with how you run it. Note: if you choose this option, you need to have money to repay part of your business partner capital investment + any profit that he/she has accrued.

For example: you and your business partner are joint owners of the business. Each of you has a 50-50% share and at the beginning, each of you invested USD 50 000 in the business. You started doing business 3 years ago and since then, the business has generated USD 20 000 in net profits. According to your business agreement, you split net profits 50-50. Now, you want to change the weighting to 90-10%.

Based on the business agreement, your business partner is entitled to USD 60 000. Note: I am keeping the example very simple and ignoring things like interest, assets, and future earnings. If you want to change the existing agreement to reflect this change, you will calculate it as follows:

Repayment of capital share:       USD  50 000 (This is the amount your partner invested at the beginning)

Cash out profit share:                   USD  10 000 (This is your partner’s share of the net profits)

Total repayment to partner:       USD  60 000

Business value:                               USD 120 000 (50 000 invested capital times 2 plus 20 000 profit)

10% investment by partner:        USD  12 000 (120 000 * 10%. This is what your partner will have to pay to gain a 10% interest)

Actual payout to partner:            USD  48 000 (60 000 minus 12 000. This is what you will have to pay to your partner to reduce their share.)

2. Buy out your business partner

If you want to end the partnership but continue the business, find out if your business partner is willing to sell his or her share. If the business is yet to grow, this may be simple. You simply offer to repay them the capital share that they put into the business. If the business is not even making revenue yet, you can also offer to repay them less than what they put in, up to 50%.

But if the business is big or if it has grown bigger since the two of you started it, consider having a lawyer or other professional and objective third party to help you negotiate. Make sure this third party is acceptable to both business partners.

You may also want to consider bringing in an accountant to help you understand the value of your business. The main reason is that you are not just looking at your financial position, the contributions made by you and your partner, and future income. You will also need to look at the monetary value of your partner’s expertise that was contributed to the business. For example: if he or she is a very good salesperson, that expertise is adding value to the business and needs to be taken into account.

For your accountant and lawyer, also consider the possibility of getting funding. If you do not have enough cash on hand to buy out your partner, you may need to get a loan. Banks may not be willing to lend you money because they may feel that your business risk has increased due to one partner leaving. Consider buying out your partner by paying in installments (with interest). This is something you should absolutely discuss with a lawyer to make sure that all agreements are legal. Do this after you have determined the business value with an accountant or financial analyst.

3. Offer your business partner a royalty agreement

If your business partner played an important part to build up the business, this is something you could consider. For example: let’s say they developed a product that made the business grow very fast. You can offer your business partner to repay their capital share + a certain equity based on your profit-sharing clause in your business partnership + a certain percentage of net sales for life if they step down from the company. This will allow them to profit from what they put into the business. At the same time, it allow you to run the business in whichever way you want while you still benefit from their expertise. Win-win.

4. End the business partnership and walk away

Sometimes, the only way to fix a bad business partnership is to completely terminate it. Again, study your original business partnership agreement. If you wrote it correctly, it will contain information about how to end the partnership. You will also need to reach agreement with your partner regarding 1) how to handle contracts, 2) how to deal with customer accounts, 3) how to manage business loans that the two of you signed for, and 4) any other operational business aspects.

Suppose the the two of you want to continue the same kind of business, but separately from each other? You should first of all refer to the partnership agreement. Does it allow you to continue in the same line of business and in the same area? If yes, you will also need to reach agreement about how to handle customer relationships. You will need to discuss how to split your customer base. Which customers are for your partner and which ones are for you? This can be particularly challenging if for example your business partner was in charge of marketing & sales.

Tips:

  • Always create a legal document to capture all agreements. Do not work with a gentlemen’s agreement (verbal agreement)! Note: If you are on my mailing list, you have received a draft business partnership agreement that you can adapt to use in your own business.
  • Make sure to have clarity on how to act after the partnership is ended. For example: which products or services is each partner allowed to continue selling? How to split the customers? Try your hardest to avoid your former business partner becoming your competitor while using your products or services. Or by stealing your customers and employees.
  • Be fair to each other.
  • Do not make the mistake of blaming each other. You will lose more than necessary. Stick to the facts and make sure you can prove them.
  • Try to not be emotional. Do not approach your business partner with anger or threats. Do not try to manipulate them. Always remain rational. This will help you get the best possible solution.
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Key message

Be very careful before deciding to enter into a business partnership with a family member, spouse, or close friend. You may be risking more than you might think. When you go into business, you bring up money issues, and money can very easily cause problems. If you go into business with somebody from these 3 categories, you must be ready to decide whether you want to save the relationship or save the business. If you decide to save the relationship, it may mean that you have to walk away from the business.

How may I help?

What else can I help you with? Just click the button under this post to tell me, and I will answer your questions in future blog posts. Also, don’t forget to Like our Facebook page so you can join our discussions.

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