Three Exit Clauses To Consider When Starting A Business Partnership

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Eventually, all business partnerships end. Someone gets tired of the work involved, wants to move away, or decides to retire. Sometimes the relationship, like any other, just sours over time. That's why it's important to have an exit strategy in place from the very beginning. These are three clauses to consider when forming your business.

1.) The Right Of First Offer

This clause in a business contract requires you to name a price for your share of the business and offer it to your other partners before you try to sell it to anyone else. They don't have to buy if they don't want to, but once they refuse the offer (or fail to negotiate a different price), you can sell your share of the business to anybody you see fit.

In theory, this method favors the partner who wants out of the business because it effectively puts the other partners on notice that they could end up with someone they don't know (or like) as their business partner. However, it may not always be easy for you to find a buyer right when you want out, especially if the business is a tight-knit one or the general market is on a downswing.

2.) The Right Of First Refusal

This method requires you to find a third-party buyer and get an offer on your share of the business. Your partners then have the option of either matching the price and buying you out or letting you sell to the proposed buyer.

This method is generally a little harder on the partner who wants out. A lot of potential buyers don't want to waste time negotiating a deal that's contingent on whether or not the seller's partners decide to buy instead. However, it may also give you an advantage when it comes to setting your price -- since you already have a deal on the table, you know what your share is worth before you approach your partners about the sale.

3.) The Shotgun Clause

Nobody wants to end a business relationship on bad terms, but it happens. When a business relationship deteriorates, it can be as messy and emotional as a divorce. If your partnership agreement includes a shotgun clause (also called a buy-sell agreement), you can abruptly force the partnership to a close.

In order to trigger the clause, you decide on how much you are willing to pay your partners for their share of the business and notify them that you intend to buy them out. If they don't want to sell, they have to buy your share for the same price you offered them.

This tactic can work for or against the partner triggering the clause. If you offer less than a fair price, thinking that your partners can't come up with the money and they do, you can find yourself forced out for less than your share is worth. Even if you offer a fair price, there's always the chance that your partners will choose to buy you out instead of selling to you. That could mean leaving the business when you really want to continue. However, if you're really ready to be done with the whole thing and the situation is acrimonious, it can provide a quick resolution for your problems.

Talk to an attorney before you start or end a business partnership so that you clearly have exit strategies in mind and understand all of the possible ramifications. How you decide to handle things at the beginning of your partnership can heavily impact its ending.

For more information, contact George M Cappello, Lawyer. or a similar legal professional.