Business Partnership Prenup: Got Yours?

Four Ways to End Your Business Partnership

As we gain the courage to start a company, many times it helps to spread the risk of the new business with a partner. That’s proven to work well for thousands of companies. But the uncomfortable truth is that eventually, every business partnership must end. The most common driver is a deadlock where the two parties want different things. Maybe it’s a decision to expand into a new market or region or invest in new equipment. Whatever the reason, when two partners find themselves at odds, it threatens the viability of the business itself.

Finding ways to break these deadlocks is always contentious and sometimes leads to dramatic endings, such as the sale of the business. That’s why, as I’ve written before, putting “breakup” language into every partnership agreement right from the start is critical. While signing a business partnership prenup might seem overkill when you and your partner are on the best of terms, it will feel like a godsend when things inevitably hit the fan.

The last resort in a challenging situation is to bring in a mutually trusted third party, like a board member, to help break through the deadlock.

But what if you can’t find a way to see eye-to-eye again with your partner despite the help of a third party, and you don’t have a pre-planned route to resolve your differences? Then it might be time for one of the partners to buy the other out.

1. I cut, you choose.

Think back to when you were a kid, and your parents found creative ways for you and your siblings to share things, like a birthday cake. For everyone to feel like they got a fair slice, you might have played a bit of a game where one person would slice the cake, and then the others would choose which piece they wanted. This worked well because the person cutting the cake would do their best to ensure that every slice was equal so they wouldn’t lose out.

The same dynamic can work in setting a value for a business. One party sets the company’s value, and then the other party decides whether to buy or sell. Like with the cake, the party placing a value on the business is looking to find that sweet spot where they can buy or sell at a fair price.

2. The two-envelope method.

In this approach, each party writes down what they are willing to buy or sell the business and puts their number into an envelope. Whoever puts the highest number down on paper then becomes the buyer. This aligns both parties. You don’t want to lowball your offer because you will sell your share of the business below optimum value. At the same time, if you write down too large a number, you’ll be overpaying your partner for their share of the business. The goal should be to put down a number you’d be happy with in either scenario.

3. Get an appraisal.

One of the most common approaches partners take if it comes time to sell a business is to hire a third-party appraiser or attorney to set the value of the company. This approach has several problems. One, it’s expensive to hire experts like this. Second, appraising a business is often more art than science. It doesn’t always reflect the actual market value of the company–it’s often too high or too low. But this approach can still work if both parties trust the work of the third-party appraiser they bring in.

4. Leave it to chance.

If both members of your business partnership are fond of gambling, they can determine who buys who out by chance. If both parties can agree on the value of the business, either through an appraisal or through their own estimates, flip a coin or roll a die to see who owns the company moving forward. It might not be scientific, but it can be an easy and cheap way to get to a rapid resolution.