Article: June Campbell

The Small Business Library

August 9, 2000

Saying Goodbye to your Business Partner [Exit Clause]

If you have or are considering acquiring a business partner, you already know the advantages. Not only do you infuse your business with new cash, new skills and new business contacts, but you have someone to share in decision making and brainstorming.

Despite these advantages, business partnerships have a higher failure rate than any other business structure. Some partnerships are designed to last for a set time. Others appear to have been mistakes from the very beginning. When the time comes to "say goodbye", many such partnerships end with animosity matching that found in the most acrimonious of divorces.

The best time to plan for a partnership break up is in the beginning of your arrangement -- before tensions have started to build. By including an Exist Clause in your partnership contract, you will ensure that the transition will be smoother if and when the time comes. More importantly, partners will be more flexible defining processes at a time when the discussion is theoretical than they will be at a time when both are striving to optimize their own ends.

With an Exit Clause, you will have a clearly defined procedure for winding down your partnership activities. Since a good Exit Clause will clearly define the rights and responsibilities of each partner at the time of breakup, the path has been smoothed. Moreover, everyone involved understands the consequence of ending the partnership arrangement. There should be no unpleasant surprises.

Naturally, you will want to consult with legal counsel before drawing up an Exit Clause or any other legally binding agreement. The tips that follow are to be viewed as general guidelines only.

A good Exit Clause should address a number of issues. First on the list is the matter of business assets and how those assets will be distributed at the dissolution of the partnership. Specify what will be done regarding capital assets, equipment, real estate, client lists and investments. Don't forget to include goodwill. Although goodwill is an intangible asset and sometimes different to measure, it is nevertheless worth a great deal and should be addressed.

Does your business have employees?
What arrangement will you make for these people at the end of the partnership?
How will they be disposed?

Consider also how warranties, guarantees and product liabilities will be handled after the partnership is dissolved.

If applicable, include statements around non-disclosure of trade secrets, non-competition, copyrights and patents, and division of future profits.

Many Exit Clauses include rights of first refusal and shotgun clauses. With these clauses in place, a departing partner can invite the other partner(s) to either buy his/her share of the business or to sell their shares to the dissatisfied partner. Shotgun clauses are usually used as a last resort when relationships have deteriorated seriously.

One last thought: Does your Partnership Agreement include a Conflict Resolution Clause?
It's not part of the Exit Agreement, but rather a format for resolving conflict throughout the life of the partnership. Who knows? If an ounce of prevention is worth a pound of cure, perhaps good conflict resolution procedures will pave the way for improved relationships and minimize the tensions that often lead to a partnership breakup.