The one thing that most business partnerships get wrong (with terrible ramifications)
Nine out of ten business owners in partnership with others don’t have a formal exit agreement in place.
An exit agreement is a legal document between the owners of the business covering the main exit events such as death, disability, divorce, disappearance, retirement and fraud. It details what happens to your share of the business, should the above and other exit events you’d like covered were to occur. In the absence of an exit agreement, disputes arise, costs are incurred unnecessarily, and all owners are distracted from running the business.
I had spent 13 months planning the setup of a business in the year 2000 with three other business owners. We had each received independent legal and accounting advice. We believed we had all our bases covered. Yet, five months after we had set up the business in 2001, there was a disagreement between the owners and one person was forced to exit.
The problem was we didn’t have an exit agreement which would have been a formal road map on how to exit one of the owners. As we didn’t have an exit agreement, we incurred unnecessary costs, uncertainty and the business suffered. The owner eventually exited, but it took eight months to do so, and the remaining owners had to take on more debt.
If you are in business with others and you don’t have an exit agreement, get one! A bit of proactivity will go a long way to providing certainty should the worst happen and save a lot of money as well as stress in the long run. Exit agreements aren’t required when everyone is talking and getting along; however, that’s the best time to get this document in place.
Remember if couples divorce, there is a family will to help sort out the process. In business when owners fall out, there isn’t a family court. The legal bills will mount up, especially if there is a lot at stake. The more valuable the business, the more acrimonious the battle will be.
If you are an existing business without an exit agreement, the next time the owners meet to consider business issues, table the need for an exit agreement to be drafted and signed. If you think your current legal arrangements cover exits, have them checked by a specialist to ensure what you have in place is comprehensive and up to date. A current up to date exit agreement will give all business owners and their families peace of mind, but hopefully, you’ll never have to rely upon it.
About the contributor:
Daryl La’Brooy is a Business Exit Strategist who works with business owners and their families to protect a lifetime of effort should the owner leave the business involuntarily or voluntarily. He does this by bulletproofing the owner's income and value they have built up in their business. Website: http://www.bops.com.au