Dissolving a partnership when no agreement is available

Here’s the bottom line: if the partnership is being dissolved or one partner is being bought out by the other and the relationship is amicable, the chances for seamless business transition and success are much better. The difference between a positive experience and a stressful one can also come down to the level of detail in the exit section of a partnership agreement.

At the End of a Start-Up

When an idea is first born or a product first tested under the helm of a business, founders rarely think about the end of the road. But the reality is that some partnerships simply cannot or will not make it to a second round of investment. Inevitably, the choice to buy out a partner’s share will turn into a process that starts with the valuation of the business and consulting an experienced M&A professional. Once the valuation is done, the individual who wishes to buy out a partner’s shares will have to consider if an immediate purchase is within reach or if financing the buy-out is necessary. Many banks will consider funding a business-acquisition loan, where the partner being bought out acts almost as a lender, receiving the money with interest over time. But, again, the partner being bought out must be open to this opportunity.

How to Buy Out A Partner’s Shares

The decision to buy out a partner’s shares could be to introduce new members into the fold while keeping continuity and familiarity. This is especially true if the partner buying out is the successor of the partner that is exiting the business. Some companies decide to announce the transition and work towards making it a reality within the year. Others choose to buy out a partner’s shares and extend the transition process over a decade. Either way, the partnership agreement’s “exit” section must be consulted, and the sale of the business might have to formally be initiated, in order to show that there is a direct “passing” of ownership. For accounting purposes, individual teams will have to be dissolved and “re-hired” during the transition.

In some cases, dissolving a partnership, while amicable, might be for reasons of merging or being acquired. This is especially true of present-day tech start-ups that focus on app development, for example, which are notorious for hitting a certain level of user acquisition and success in order to attract bigger firms who wish to acquire the company.