Partnership breakdown

Handling a partnership breakdown is not for the fainthearted and requires certain skills. Like a divorce, breakdowns in a business partnership tend to be messy and traumatic. So when the breakdown comes, you have to do it in a certain to avoid too many headaches.

The first thing to have is a solid contract. Exit plans need to be detailed in advance. For that, you write up a simple understanding with an exit clause built in for each partner. Then you can go back to the partnership agreement or other business documents that detail the structure of the business. The document should spell out how disagreements or severance is handled.

Secondly when it comes to financial resolution, it is wise to err on the side of generosity rather than risk litigation by being greedy or spiteful when ending a business relationship.

Also when entering a partnership, get a pre-nup. That way, no matter how heated things get, both you and your partner are protected. A pre-nup forces everyone to abide by terms upon which they agreed when cooler heads prevailed.

Also, define a set of mutual desired outcomes. That allows you to operate from a place of mutual fairness. Doing that, you can generally find an amicable resolution to any business partnership that has come to an end.

The agreement should set out issues like how the business is controlled, how the profits are shared, how the assets (including intellectual property like trade names) are divided and, importantly, who is liable for business debts. Unless you have that, you can bet the partners will disagree about what they claim are their respective entitlements.

As part of that, there needs to be a dissolution of partnership agreement covering issues such as one of the partners being asked to act as administrator of the dissolution, a recording of the assets, arrangements where partners may buy the assets individually and disposal of the remainder of the assets.

You can go to a lawyer to draw up a partnership agreement. An alternative might be to draw up one of your own, and then take it to a lawyer to check over (it will save you money). The Australian Society of Entrepreneurs has some good guidelines and even provides you with a pro forma partnership agreement template.

When things cannot be worked out amicably, it usually goes to litigation where one of the parties institutes proceedings under the ‘oppressive conduct’ provisions of the Corporations Act. Others bring on proceedings in respect of the breach of a director’s duty; or brings an application to wind up the company, and in some cases, all three.

That could often be a short cut to either working things out or winding up the company.

As a rule, court will do everything to avoid winding up a solvent company, particularly when employees will be affected, perhaps by ordering early mediation.

Ultimately it can order a winding up if there is no other way.

More importantly from a tactical point of view, just foreshadowing these sorts of proceedings may force the recalcitrant party to the negotiating table.

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