Business partnerships present a golden opportunity to bring a wealth of extra resources and knowledge to the table. In many cases, you can accomplish more than you would by going it alone.
According to the Federation of Small Businesses, 7% of UK businesses consist of ordinary partnerships, meaning thousands of businesses become profitable through the efforts of two or more entrepreneurs coming together; but what happens when partnerships go south?
Planning an exit strategy for a partnership is critical to claim your portion of the proceeds and enable a smooth exit. This guide discusses how a partnership exit strategy works.
What is an exit strategy in a partnership?
Exit strategies are your exit plan to extricate yourself from an existing partnership and depart the business. They detail the terms of engagement and how you will keep the business running after you are gone.
Additionally, exit plans provide contingencies for unexpected exits, such as an acquisition interest, partnership conflict, or a sudden illness. We also live in a time of significant economic change. It’s led to 23% of businesses fast-tracking their exit plans for one reason or another.
In essence, an exit plan is both a step-by-step guide for departing your business partnership voluntarily and involuntarily.
Do you need a business partnership exit strategy?
Every owner and founder requires an exit strategy, whether they have a partner or not. Some of the advantages of possessing an exit strategy include but are not limited to:
· Allowing a swift exit.
· Maximising your share of the business.
· Preventing legal disputes.
· Empowering the business to continue operating after your departure.
· Enhancing the value of the company.
As you can see, exit strategies prevent chaos and stop you from leaving money on the table. With partnerships, exiting can be even more complex than a conventional sole proprietorship because of the risk of disputes and conflict.
How do you plan to exit a business partnership?
The first step to planning an exit strategy for a partnership is to open discussions with your partner. Ideally, you should already have a written agreement from day one laying out the terms of the partnership and what happens should a partner decide to leave for any reason. If not, now is the time to draft one.
It’s also strongly recommended that you consult a business partnership exit consultant with experience in dealing with these types of exit strategies. They can objectively view your business to determine the type of exit plan right for you.
Furthermore, exit strategies involve an in-depth examination of your business as it is, which will also guide you on areas where you could improve and a final valuation.
Remember, planning an exit strategy doesn’t imply a lack of confidence in your partnership. It’s a contingency that accounts for any possibility.
In no scenario should you attempt to plan an exit without the help of an experienced professional by your side.
What to consider when planning an exit strategy for a business partnership
Every exit strategy is unique because every business is unique, and the same goes for the person leaving said business.
For example, the UK is seeing a rise in people over 50 taking early retirement. It’s one of the reasons why planning a formal exit strategy is vital in these changing times.
So, what should you consider as part of an exit strategy?
Timing – Time matters. Exit strategies provide clear tripwires for when a partner will exit a business. It could be at a specific age or tenure or involve financial metrics. You’re not bound to any of these, but it helps to provide some guidance.
Type of Exit – Selling to a third party, selling to your existing partner, acquisition interests and IPOs are just some exit options. Any good exit plan will include guidance on every common exit type.
Effects – Exit plans discuss the impact on the business, including its value, day-to-day operations and management. It will also include a detailed list of your transition team’s responsibilities.
Communication – Depending on the size and type of business, you may also have communication obligations, whether these are to the public, customers or employees. Your exit strategy will include a communication plan to manage the exit smoothly.
These are merely a broad overview of some critical considerations an exit plan must consider. By working with a professional consultant, you can guarantee that you’ve covered all the bases.
Common problems when exiting a partnerships in business
Exiting a partnership has unique challenges that do not apply to other business structures. It’s critical to anticipate these problems to overcome them with minimal hassle.
Any consultant will also consider these core sticking points to ensure that your exit plan is fit for purpose.
Not having a plan
The biggest problem is not having an exit plan in the first place. Too many partners believe they have such a good relationship that they don’t need one, but business is stressful, and things can change quickly.
Without a plan, you risk day-to-day operational disruption and even legal showdowns to rectify the matter. No exit plan means nobody wins when the time comes to sever ties.
Valuation
Partners can have very different views as to what a business is worth. They can also have alternate views on what their share of the partnership is worth.
Discussions over money are the leading cause of conflict when attempting to exit a partnership.
With an exit strategy in place, you can take advantage of an independent valuation determining the payout each partner receives when they leave. This is the most important step in preventing litigation.
Unexpected events
What happens if your partner is involved in a fatal car accident on the way home from work? What if you are no longer able to run the business due to mental health issues?
Whether it’s salary, benefits for the deceased or the cash-out value, unexpected events can shake a business to its core.
Although exit plans discuss matters like acquisition interest, they also help you to plan for the worst so that you can weather the storm.
Conflict
Differences of opinion and vision can quickly turn a business partnership into a battlefield. Without a clear exit strategy, the only result is a bitter round of litigation in the courts, and these disputes can last for years.
Although it’s sad to see a successful partnership fall apart due to conflict, it’s not uncommon; but an exit strategy is also planned for these events.
Crucially, exit strategies provide an objective viewpoint that eliminates personal issues and emotional baggage, which can ward off litigation and enable a clean break for both sides.
Not hiring a consultant
Many entrepreneurs choose to formulate exit strategies alone. Unlike other business paperwork, nothing prevents you from managing your exit strategy in-house, but this is a mistake.
Exit strategies are deceptively complicated. Missing even a single point can cause your exit strategy to collapse once implemented. A professional exit strategy typically involves vital legal, business and financial professionals. With their expertise and know-how, they can create an exit plan that can withstand scrutiny.
At Hilton Smythe, we specialise in supporting business partnerships looking to plan for the near and distant future. To learn more about what our exit consultants can do for you, speak to the team now.
