Posted by: Daryl & Wendy Ashby | May 18, 2011

Partnerships vs Friendships

It might not be quick and easy, but it is possible for partners to split up or exit the business in a way that’s fair and acceptable to all concerned. To accomplish that goal, responsible business partners must prepare themselves well before the time comes.

Patrick Uzan, a senior tax manager for Valente & Theocharis LLP in London, Ont., has clients of all sizes and kinds of businesses, and has helped facilitate many shareholder and partner buy-outs. Here are five of Uzan’s most important tips for harmoniously severing business partnerships.

1. Draft a shareholders or partners agreement when you start the business together. This document should be completed as part of the planning process and can be as flexible as the owners want. It will define how the buy-out process will be carried out; events that may trigger, require or allow for a buy-out; how the buy-out may be financed; and any rights and restrictions applicable to those involved.

2. Examine all your options. Some choose to retire from work, but continue as owners of the business rather than immediately selling their interests, Uzan says. Even without a salary, you could be eligible for dividends or redemption of shares or partnership interest over time. Make sure you know the tax and financial ramifications of whatever course you’re considering. Get advice from your accountant as to your alternatives and the associated tax implications.

3. Have a meeting of the minds. Unless exceptional circumstances call for the involuntary removal of a partner or shareholder, let your partners know what you’re thinking in a general, informal way first. Ask for and listen to their ideas. See if they’re willing to retain an independent Chartered Business Valuator – a designation that many professional accountants have – to attribute a value or range of values to the business. This can help facilitate the price negotiation process, should that not be specifically defined in the partners or shareholders agreement.

4. Understand how the value of the business is determined. Professional valuators use generally accepted valuation principles to arrive at a value for your business, Uzan says. They consider the  assets, liabilities and past performance, but also look at non-financial and external economic factors such as the location of the business, competition and the state of the industry and the economy. These factors can also help ascribe a value to the goodwill of the business.

5. Get lawyers to draft the documentation. Ensure that a business lawyer drafts offers, letters of intent (binding or non-binding), and the final purchase and sale agreement. He will ensure that all parties’ intentions are accurately reflected in the buy-out agreement and alert you to any important legal matters that need to be resolved.

Consider these points as you set up your business and you’ll probably find it’s possible to lose a partner but keep a friend.

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