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What to know about exit strategies in business partnerships

On Behalf of | Feb 1, 2024 | Business & Commercial Law

You or your business partner may have different goals in the future. Accordingly, you may want to leave the company. Or you may wish to retire. For this reason, it’s crucial to include an exit clause in your business agreement. 

Here is what to know about this clause:

It should state your options

Your exit strategy should describe your options when a partner leaves. The partner leaving may sell their shares to the one remaining or you can agree to bring in a third party.

With the first option, you will determine the value of the business, the terms for buying the shares and the buyout structure. If you are more than two partners, the partner leaving will determine who they will sell their shares to.

With the second option, you can groom a third party to replace the one leaving or choose them after the exit. The former route can be more beneficial, as you will have more time to find the right partner. Besides, the business can continue its operations smoothly after the exit.

Note that some partners usually opt to close their business when one exits. If you want to consider this option, you can sell the business and distribute the profits. 

Earlier communication is better 

A partner who wishes to exit the business should inform the other earlier to avoid misunderstandings and last-minute rushes that can lead to costly mistakes. Ending a business partnership requires time – you need time to prepare/find another business partner or a buyer. It can be unfair to do this within a limited period.

Exiting a business partnership doesn’t have to involve conflicts. With a clear exit strategy and effective communication, a business partnership can end professionally.