Every day, it happens to somebody in the green industry. Events dictate that they must leave a business that they have owned, either individually or as a part of some form of partnership. The reasons range from critical ones, such as illness, disability, divorce or other family matters, to a desire for a change of vocation or location. Oftentimes, it may be triggered by the simple fact that partners, for whatever reasons, don’t want to be partners anymore.
Consider this story: Buck and Brandon had been partners for a long time. They had started their landscape business together when they were nineteen years old. It was really just a lawn mowing business then, a part-time venture during college. Thirteen years later, the business had grown enormously. The business had done very well. Brandon had managed the landscape maintenance part of the business, in many ways the bread and butter part of the business. Buck had focused in irrigation services. As water restrictions had become common, Buck developed some innovative strategies to conserve water in irrigation that had brought a great deal of attention and business to their company. Brandon and Buck were both married now and, if the truth were known, their wives were never as close friends as the two men were.
At first, the two parts of the business seemed to support each other. Now, cash flow was really dropping off as investment in the irrigation business increased. For the first time, Brandon and Buck did not agree on how to run the business. Brandon thought that it wasn’t fair for the maintenance business to fund the irrigation business. His part of the business was more profitable than ever, but cash was tight. That was making things hard at home as well. Buck knew the investment in new irrigation technology was training the business, but he was sure it was going to pay off. He had convinced his wife that with time, the value and importance of water conservation would be clear to everyone and that companies like theirs would have a serious competitive advantage. Buck’s wife saw him as the visionary in the business.
Although they had always split the earnings of the business 50-50, pressure built as cash flow fell. Brandon’s part of the business was doing better than ever, yet his pay check was down nearly 40%.
One day Buck and Brandon sat down to talk. Both knew it was time to break the business that had started in their parent’s garage and had grown to nearly $6 million in revenues into two separate businesses with separate owners, but they didn’t know where to start. When they had started their business together, they had not thought for even a minute about how to separate things if they ever wanted to.
Although tension had begun to build Buck and Brandon resolved that day to find a way to work it all as amicably as possible. They had been friends for 20 years and wanted to be friends for another 20, even if they would no longer be business partners. They called a consultant they had met at the Green Industry Conference and asked him to help them sort it out.
Buck and Brandon made a good decision in seeking help to work out their separation. Many other business partners wait too long to resolve their issues and the problems fester into severe disagreements that can damage or destroy a business and may wind up in costly litigation.
Whether or not one is the sole owner of his business or one of several partners, it is a given that one day he will want to (or need to) exit the business. That situation is usually complicated and often stressful under the best of scenarios. When the business has more than one owner, the issues multiply.
While business partnerships are very common, partners may have very different personal situations and perspectives, which may make planning for the exit of one partner very difficult.
Several questions come to mind:
- If one partner wants to or needs to leave the business, will the remaining owners (or the business itself) be obligated to buy him or her out?
- If a partner does leave the business, can he or she compete against the existing business?
- How will the business be valued for the purposes of buying out a partner?
- How will the buy-out be financed? Will the partner be paid out in cash or in installments over time?
- How will the inevitable disagreements be resolved?
- What if one partner believes the time is right to sell the business and another doesn’t?
These questions are best addressed when the business is formed or acquired (or when a new owner is added). An agreement among the partners covering these topics is called a “buy-sell agreement.”
Even when a buy-sell agreement is already in place, it is a good idea to review where a business stands with its owners regularly and to update the agreement based on changing circumstances. The complexity of the buy-sell agreement is likely to increase as the business is successful and grows.
It is particularly important to address how the obligations under a buy-sell agreement will be funded under various circumstances. For example, it is rather uncommon for a small business in the green industry to be able to self-fund a cash buyout of a partner. In the current lending environment, it may also be very difficult to borrow the funds to buy out a partner. It may be necessary to make the buyout a payment over time funded from the business’s cash flows. In some cases, insurance can play a role. It is fairly common for a business to use life insurance to fund the business’s obligations under a buy-sell agreement in the event of the death of a partner. But, of course, death is only one of many situations that a buy-sell agreement must address. For example, in many cases the risk of one partner becoming disabled is far greater than of a partner dying.
Another question that may arise in cases in which the exiting partner’s interest is to be bought out over time is what the exiting partner’s rights (and obligations) should be until the pay-out is completed or, perhaps, reaches certain milestones. Does he or she still have a say in how the business is run until he is paid?
The objectives of the buy-sell agreement include producing a fair result to all of the owners of the business and preserving the value of the business for its owners, both those who will remain with the business and those who will exit. There is a good chance in these situations that neither partner is going to feel great about the results, but the agreement should pave the way to a resolution that will avoid unnecessary conflict. Achieving those objectives requires planning on the front end. It also requires regular updates to make sure that the plan that made sense when the agreement was written still makes sense in the present and can actually be executed when the time comes.
If you find yourself with a need to end a partnership without having planned for the situation in advance and you and your partner don’t agree on the right process for the split, there still may be some ways to avoid a fight and the inevitable damage to the business that is likely to result. One alternative is to try mediation, either informally or formally.
With informal mediation, you can bring in someone independent of the situation that you both respect to help you sort it all out. With formal mediation, you bring in a trained mediator to help you reach agreement. If mediation doesn’t work arbitration may be another option short of a legal battle.
But there is no doubt that it is a much better option and a far cheaper one to plan for a partnership dissolution in advance, before conflicts arise.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net