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Business Services  •  Business Tax  •  exit strategy  •  financial advice  •  Personal tax  •  Probate and Inheritance Tax  •  Small Business  •  Uncategorized

How to get out when business turns from sweet to sour

By RJP LLP on 29 September, 2011

Businesses running as a partnership, or companies managed jointly by a group of directors can be highly successful and offer the best of all worlds to those involved. You get to share the decision-making and responsibilities; benefit from each other’s strengths; learn from one another; reduce the level of financial commitment; and ultimately, collectively enjoy the rewards.

Sounds wonderful but a surprising number of business partnerships, whether formerly run as such or as a company with multiple directors, get into trouble. Circumstances, aspirations, priorities – people - change and at times, things can become bitter and acrimonious.

Typically the tell tale signs of partnership troubles we see are:

  • one person feels they are doing more than their fair share of the work;
  • the business suddenly becomes successful and one partner feels it is all down to them;
  • conversely, the business suddenly loses a lot of money and a scapegoat needs to be found;
  • a partner/director appears to have lost interest in the business;
  • there are more regular disagreements;
  • personal issues in one person’s life are interfering with their performance;
  • disagreement over the future direction of the business.

When circumstances change in this way, it is important to take control of the situation. It’s possible your partner/ co-director is unaware you have identified problems, or there may be an opportunity to take action collectively. Be clear about what it is you want and expect from the business; discuss these issues openly and try to agree what it is you each seek from the business in the longer term. Then set goals – SMART ones preferably – which are related to a specific action and outcome being achieved within a set timeframe.

One reason why many business partnerships get into trouble is through an absence of a clearly defined partnership agreement and job roles. Together, review what each of you is doing for the business on a daily basis and document it as an official job spec. This will help highlight if one person is doing a lot more than the other. It will also bring any misunderstandings to light and highlight where additional help is needed.

If, after trying to resolve the problems, things are not better within a certain agreed timeframe, it may be time to make the hard decision over whether to continue. Obviously if your business partner also happens to be a relation, or your spouse, things are more difficult, and beyond the scope of this article! Either way, getting out of the situation is likely to require a change in your business status. You may decide to close up shop completely, sell the business, sell your share to your partner or buy them out. The most common way to force an unwanted partner to leave a business is to buy them out. You may also look to dissolve your share and restart with a completely new entity.

In order to reach a conclusion, it is necessary to accurately value the business in accordance with the requirements of any partnership agreement or shareholders’ agreement in place. If you are looking to buy a partner out, it will be necessary to reach an agreed value of their share of the business and repay their entitlement to profits. For shareholders the value will be the value of their shares, as valued (usually) by an independent auditor, or in accordance with a formulae included in the shareholders’ agreement.

If your partner is not interested in the offer to be bought out and the business is able to continue in different directions, it may be possible to divide the firm’s interests. This will result in two new companies or businesses being formed, with each partner owning 100% of the shares in their own entity. This can be achieved tax efficiently, but from a practical point of view, unless the business has two distinct elements – a restaurant and separate café, a web development and graphic design agency, or say a cleaning and ironing business – it can be difficult to agree on the dividing lines.

Where separation involves agreeing the rights to intellectual property – graphic artwork or a web content management platform for instance, it will be necessary to account for this in the financial settlement. Either the rights are assigned to one business as a separate entity or you may agree to pay a partner a royalty based on future earnings from their share of the intellectual property. So, in the case of the web development platform for example, they may be paid 5% of all revenues generated in using that tool. If after lots of negotiating it is impossible to come to an amicable agreement, the final option is voluntary liquidation; the company or partnership is formally dissolved; each party takes back their share and is free to set up again alone.

For anyone who might have been through an experience like this before, you will appreciate the value of having a formal business partnership agreement in place. Once things start to fall apart, it’s a bit late to think retrospectively about what should happen when they do, which is precisely why a document like this, prepared when things are amicable, is so important.  Of course, many businesses flourish and business partners/ co-directors work amicably together for many years. But our advice when starting a business with a partner or a group of individuals is to always put in place at the outset a detailed partnership agreement which outlines exactly what the aims of the venture are; each person’s responsibilities and rights; and what will happen if outcomes are not in line with expectations.

If you would like advice on valuing your business, please contact Simon Paterson at sp@rjp.co.uk.

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