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Surviving business partnership failure

One of the most common reasons we have for listing a business is partnership failure. Often people will say, "I just want to sell my share" or "I'm looking for a new partner." Of course, it is much more complicated than that. I'd have a better chance of taking them to a pub and introducing them to the person they’re going to marry than I would finding a business partner that's going to work!

Partnership failure isn’t business failure

People go into partnerships looking at all the positives but they don't plan for a rainy day. From the outset, it’s important to remove the rose coloured glasses and put in place a shareholders' agreement, a partnership agreement or a trust agreement. These agreements can be worded so that all eventualities are covered.

The sort of things to be considered are:

  • What happens if one partner wants to sell out?
  • If there is a disagreement, how is it resolved?
  • What do we do if we need more capital?
  • What happens if one of the partners die?

When there is a disagreement and it goes to the lawyers, the first question they ask is, “Do you have a partnership or a shareholders’ agreement?" If you do have one in place, the whole process becomes much more manageable.

Splitting up the roles

Another thing to be considered is the roles the partners play in the business. The job responsibilities and skills that they bring to the enterprise are usually an essential part of profitability and it’s a good idea to set out in writing what each persons is tasked to complete to make your partnership venture a success.

Quite often, partnerships are set up by people with different skills—one will look after the business side of things while the other is finding new business and setting up deals. When one of those skill sets is withdrawn, it has an immediate impact on the business.

Covering all bases

Money does strange things to people (think Golum), unfortunately even friends and family. When setting up a shareholders' agreement, all the bases must be covered. If someone stops working in the business, do they still get half of the profits because they have half of the shares? Are they entitled to it? Does the business buy them out or is their shareholding reduced over time because they're not operational? A good lawyer is essential in setting up any agreement.

Managing a sale after partnership failure

When people come to see us, it’s because they have decided to sell the business. We’ll undertake a valuation and if there’s a shareholders' agreement that stipulates how it's to be valued, we utilise that. We normalise the accounts and work out where the real value in the business is held. We provide them with our independent opinion.

If there's only one party undertaking the valuation, it's immensely helpful if we know there's a mandate to sell it as part of the shareholders' agreement, and to get all parties on board with the process to release maximum value from the transaction.

The worst-case scenario is when there is no agreement and one party wants to keep the business but doesn't have the money to buy the other party out, and the other party wants to sell and wants their share at the earliest. It presents us with a difficult situation and involves a lot of time and energy to get the deal across the line.

In conclusion

There is really no winner in these situations as there’s no clear outcome and they lose goodwill. If one owner is willing to assist and help the new buyers and the other one is being somewhat difficult, that can also reduce the goodwill.

The best way to avoid all of these problems is to have a clear shareholders' or partnership agreement in place at the start of the enterprise. No one sets out to fail but if things do go wrong this is the best way to ensure all parties are treated fairly.

Want to know more about what you can do if your business partnership isn’t working out? Sign up to our newsletter for regular advice from the country’s best business brokers.

Mark Jason
LINK Australia, Managing Director