What Happens If You Want To Break Up A Business Partnership?
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Originally Posted On: The Emerald Dove: What Happens If You Want To Break Up A Business Partnership?*
Selling a partnership comes with its own unique set of challenges. A partnership is not a limited company.
It is a formalised agreement between two or more partners who wish to share resources, skills, and knowledge for the benefit of all. In a lot of cases, partnerships are formed to take advantage of favourable tax arrangements. There is usually a ‘partnership agreement’, which outlines the terms that have been agreed between the parties. These terms can vary depending on who is involved.
Because of this, selling a share in a partnership can be a difficult and challenging process, as you need to look back at the partnership agreement. Below, we will reveal more about the options that are available when selling a partnership, as well as the different factors that need to be considered.
Reasons for breaking partnerships
There are a number of different reasons why you may want to sell your share in a partnership. This includes the following:
- Relationship breakdown
- Ill health
Selling a business of any sort is difficult, but when there are others involved, complexities naturally arise. The best way to sell in a partnership is to call a meeting so that you can explain your intentions to everyone else involved.
If you’ve been struggling financially, you may want to look into restructuring your business activities or borrowing money. You could look into loans for homeowners if your business credit rating is not great.
Your partnership agreement should have a part that covers what would happen in the event that one partner wanted to sell. Your partners will then need to decide whether they want to buy your ‘share’. This would be the best scenario in most cases, but all partners need to be in agreement.
The valuation of your share in the partnership
There are no set rules for how much your share of the company is worth, unless already pre-determined in your agreement. Because of this, it is a good idea to use a number of valuation methods so that you can easily compare the results. The value of ‘intangible assets’ – for example, intellectual property (IP) and goodwill – should be included on a sensible basis. By using this approach, you will end up with a valuation that reflects the market price of the partnership and your share of the partnership.
You also need to consider the method and terms of the payment. When it comes to paying for your share of the company, they may be made in stage payments. If this is the case, make sure you have a guarantee and do not link these payments to future trading performance unless you have a degree of control over the results. Why? Well, if trading performance declines, so too will the amount of money you receive. It may also be possible to charge a small amount of interest on staged or deferred payments.
All things considered, there is no denying that leaving a partnership comes with challenges. It may not seem logical, but the best approach is to plan your exit when you initially enter into a partnership.
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