How does a partnership split affect a business?
When a partner decides to leave a business partnership, they will need to notify the relevant parties to discuss the terms of the exit, as addressed in the partnership agreement. This will include dealing with the shares of the exiting partner and exploring possible outcomes. As the future of the company hangs in the balance, the next step that you take will shape what will happen to your business following the partnership split.
A partnership split may be inevitable as individuals change their outlook on life, review their professional interests and look to make a career change. The face of the business may have also dramatically changed since both partners entered the partnership.
When a partner breaks up a partnership agreement, where does this leave the business?
What happens if one partner wants to leave a partnership business?
A ‘partnership’ typically refers to either of the two operating structures – a limited company where co-directors work as partners and hold shares (making them shareholders), or a partnership which can take the form of a general partnership, limited partnership, or limited liability partnership (LLP).
The exit process will vary based on the operating structure as leaving a limited company set-up will involve disposing of shares, whereas, exiting a partnership will involve either dissolving the partnership or following the exit strategy in the partnership agreement. The outcome of a partnership split will depend on whether the business can continue without the exiting partner and whether both partners are in a dispute.
Here are some possible options if a partner wants to leave a business:
Buy shares – You may choose to buy the shares of the exiting partner, also known as a partnership buyout, either in one go or in instalments until the full shares are purchased. Shares represent ownership, so a partnership buyout may be the preferred path when a business partner departs.
Sell business – If it’s in the best interests of both parties to find a new owner for the business, the business sale route may be an appropriate option.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
To forecast an accurate return for all partners, you will need to value the business. Arrange a business valuation with a reputable business valuer or business broker to calculate how much your business is worth. The business valuation report can help guide how to split profits in a business partnership as you can work against the true figure of how much your business is worth.
A reputable business transfer agent will have built a vast record of sales data which can be used to compare how much similar businesses sell for. This business valuation method is commonly used as it takes into consideration mitigating factors, such as the trading climate at a given time.
Close the business – A mutual decision may be made to close the business due to a partnership split that stem from the likes of divorce. If the limited company is solvent and has much retained profits, a solvent liquidation process, also known as a Members’ Voluntary Liquidation (MVL) may be a tax-efficient exit route through which to close the business. If a partner disagrees with company liquidation, this could make way for a lengthy dispute between co-directors.
Replace partner – Although the circumstances may be unfortunate, the partnership split may make way for fresh talent that can take over the business and buy the shares of the old partner. Timing a simultaneous switch between partners can minimise disruption to the business.
The outcome of a partnership split will vary based on the future of the business, the role of the departing partner in the business and the terms of the partnership split.
How can selling my business support you in a partnership split?
If partners separate and you decide to sell your business, the first step is to appoint a business broker or valuer to value the business for a fee. The Selling My Business team are experts in the field of business transfer and business valuations and can support you throughout a partnership split.