We ask a small business owner and two financial experts to walk us through some of the challenges of ending a small business partnership and how to overcome them.
At a glance
Here's a snapshot of the advice from our interviewees:
- Negotiate the price based on the separation of clients.
- Be prepared to manage emotions – don't burn bridges.
- Review the restraint and non-compete clauses in your shareholder agreement.
- Get independent financial advice.
Harriet Witchell set up Australia’s first all-female investigation company with a business partner in 2000. Twelve years later, it became apparent they wanted different things, and Harriet offered to buy out her partner and end the partnership agreement.
Despite a few rocky patches at the start, the two managed to come to an amicable agreement and continue to be friends to this day. So, how did she do it?
Making the decision to part ways
“If you’re buying someone out you have to be crystal clear in your mind about why you want to do it and how much the business is worth to you,” says Witchell.
“You also have to look at what value they bring to the business. It’s hard to put a dollar figure on it but the partnership might be worth more than you think.”
If you decide to proceed after doing this, Witchell says to be prepared for an emotional kickback.
“Start by talking about yourself, what you want to get out of the business over the next five years, and how you see that happening.”
The aim, says Witchell, is to get the other person to express how they’re feeling so they can work out what their own next steps might be.
Some business owners may worry that their old partner might take their customers and set up in direct competition. To this, Witchell says: “You can’t stop somebody earning a living, but you need to talk through what is going to work and what isn’t.
“Depending on how much money is at stake, think about getting a lawyer and a financial advisor to help,” she says.
And what’s the biggest benefit from her decision to buy out her partner? Witchell says they didn’t always agree on spending decisions and this caused conflict and frustration at times. She now enjoys the freedom and peace of mind that comes from making business and financial decisions without having to consult someone else.
Since then, Witchell has gone from strength to strength in her professional career. After buying out her old business partner, she was approached again by a prospective buyer. While she didn’t want to sell, she agreed to a merger. After a few years, that company bought her out – so she’s experienced the process from both ends.
She’s now opened a new investigation business called Mykludo.com.
10 tips for approaching a business partnership break-up
David O’Toole, Managing Director of asset finance company Designer Financial Services, says there are a number of practicalities to keep in mind when parting ways with a business partner:
- If there was an original shareholder agreement, review it for guidance around what happens if one of the parties wants to end the partnership.
- Consider the division of clients in the sales contract, then determine an appropriate price based on that.
- Work to a clear timeframe to complete the sale. If you’re spending too much time trying to work out how to go separate ways that can impact your bottom line and damage the potential sale price.
- Get advice from an accountant to make sure you understand any tax implications.
- Try to ensure negotiations are fair and balanced. You never know if you might be doing business together again in the future.
- This is business. Take emotion out of it.
- If you’re worried your clients might walk, make a point of building tighter relationships and redocumenting their business contract.
- Depending on what’s been agreed upon in your contract, if your previous business partner starts wooing your clients, legal action can be taken but be aware it can be costly and put customers in a difficult position.
Davie Mach, Chartered Accountant and Client Manager with Box Advisory Services adds two more tips:
- Keep your clients in the loop and advise them of the partner’s exit. It’s the foundation of maintaining good service and communication.
- There are many ways to pay for the purchase, e.g. cash, debt financing or a mix of the two. Finance takes time, so get your books up to date and clear all partner/director loans, dividends, etc.
