What happens to a business in a partnership split?

By By HM Team – Chester, Liverpool, Birkenhead

Business partnerships split for all sorts of reasons. It can be due to blazing rows and unreconcilable views about the direction of the business, but more commonly, it’s the case that one partner wants to retire or pursue something new. Understandably, this can be a stressful time, particularly if the remaining partner wants to continue running the business.

In this blog, guest writer Jonathan Munnery from UK Liquidators discusses the several exit routes available, if you or a business partner decide to call it a day, so you can find a solution that both parties are happy with.

The importance of a legally binding agreement

When your business is hanging in the balance, it’s hugely beneficial if you have an agreement to fall back on that covers all aspects of the company and how it will be divided if your relationship changes. There is no one-size-fits-all contract. If you trade as a general partnership, you should create a legally binding partnership agreement. If you run a limited company, one of the corporate lawyers at HM3 Legal can help you create a shareholders agreement to suit your situation.

Ideally, you should put these documents in place when you set up the company, but don’t worry, as this is also something you can revisit with a specialist lawyer at any time, including when there are major changes in your business.

What are your options?

A partnership usually refers to a limited company, where the partners are joint directors and shareholders, or a general partnership or limited liability partnership (LLP). The exact process you follow will differ depending on the type of operating structure you have. A limited company will require the transfer or disposal of shares, while a general partnership or LLP will follow the partnership agreement you have in place.

In either case, there are several possible outcomes for the business – four are detailed below. They depend on whether the remaining partner can or wants to run the business alone and whether the partners are in dispute. The team at HM3 Legal advises taking advice early, including seeking a legal resolution before any disagreements get out of hand; escalations can be both costly and time-consuming.

1. Partnership buyout

If one partner wants to leave, it doesn’t necessarily have to spell the end of the business. Partnership buyouts can be mutually beneficial as the remaining partner can continue running the business on their own or attract investment from a new partner. The departing partner will receive a fair price for their share of the business and be able to leave on good terms.

The opportunity to buy the business should be set out in a buyout agreement, which you can create with a solicitor when making your partnership agreement. Without it, you could end up in court or be forced to dissolve the partnership when one partner wants to leave.

A business valuation is the first step in deciding how much the remaining partner should pay. In a limited company, the departing partner’s shareholding will help you determine a fair buyout price.

2. Replace your partner

It might be the case that you have the perfect replacement for a departing partner already lined up. They can buy out the departing partner’s shares if you run a limited company or pay a fair price based on the business valuation in a general partnership. An experienced lawyer will be able to guide you through the process to ensure you achieve the outcome you want to, with no surprises.

Replacing a departing partner can take time to finalise, but it’s an effective way to bring new talent and investment into the business to keep it afloat.

3. Sell the business

If you cannot or no longer want to run the business without your departing partner, the best option may be to sell it. This is particularly the case if the business is viable and profitable.

The first stage of the process is to value the business. A professional business valuer will be able to tell you what the assets, stock and goodwill of the business are worth. This will help you determine how much you will receive and how to split the profits from the sale. A business transfer agent will also be able to help you market the business, identify a buyer and put the relevant documentation in place.

4. Close the business

If the business cannot continue without the exiting partner or you both decide to move on, you can make a mutual decision to close the business. In a general partnership or LLP, the terms of your partnership agreement should explain the triggers that can lead to the dissolution of the business and the process you must follow. According to the Office for National Statistics (ONS), this remains a concern for some as business closures remain higher than in previous years, yet were lower in Quarter 3 (July to Sept) 2022 than in Quarter 3 2021.

The partnership agreement drawn up by an experienced lawyer should also explain how the assets and liabilities are divided between the two partners.

If you run a limited company and both want to close the business, a Members’ Voluntary Liquidation is usually the most tax-efficient way to close it down. The assets of the business will be sold and the proceeds and retained profits will be distributed to the partners before the business is closed down.

Ask for a call back: Hello@HM3Legal.co.uk

Unsure of your next steps?

What happens to your business during a partnership split will depend on factors such as the role of the departing partner, the profitability of the business and your appetite to keep it going. The good news is that you do have options, and with the right advice, you can’t turn this challenge into a new opportunity.

Interested in talking through your options for buying or selling a business?

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