PARTNERSHIP EXIT STRATEGIES

Partnership  |  Joint Venture  |  Partnership Agreement  |  Partnership Buy-Out  |  Partnership Dispute  |  Forms of Partnership

Contact Neufeld Legal PC at 403-400-4092 or Chris@NeufeldLegal.com

Although a business partnership at its inception may only evince confidence and favorable financial projections, over time this positive perspective can all too quickly disipate, such that one or more of the partners might become disillusioned with its future and the partner's involvement therewith, such that its important to consider partnership exit strategies. Hopefully, those exit strategies have been previously set out in a written partnership agreement at the outset of the commercial venture.

A. Internal Exits (Keeping the Business Within the Existing Framework)

These strategies involve one or more partners leaving while the business continues with the remaining partners or existing personnel.

1. Partner Buyout (or Shareholder Buyout):

Description: One partner buys out the interest of the departing partner. This is often the cleanest and most common option when the business is viable and one partner wishes to continue.

Mechanism: The partnership agreement (specifically, a "buy-sell agreement") should outline the terms, including:

Triggering Events: Death, disability, retirement, voluntary departure, breach of contract, or even disagreement.

Valuation Method: How the departing partner's share will be valued (e.g., fixed price, independent appraisal, formula based on financials like revenue or profit).

Funding: How the buyout will be financed (e.g., cash, installment notes, life insurance policies, disability insurance, bank loans, company profits).

Pros: Maintains business continuity, avoids external sales, can be less disruptive to employees and clients.

Cons: Requires agreement on valuation and funding, can lead to disputes if terms aren't clear, remaining partner(s) need to have the financial capacity.

2. Management Buyout (MBO):

Description: The existing management team (who may or may not be current partners) purchases the business from the current owners.

Pros: Ensures continuity, leverages existing knowledge and relationships, can be a smoother transition.

Cons: Often requires external financing, seller may not get top dollar, valuation can be complex.

3. Employee Stock Ownership Plan (ESOP) or Employee Buyout:

Description: The business is sold to its employees, often through a structured plan where employees acquire shares over time.

Pros: Can preserve company culture, provides a gradual exit for the owner, potential tax benefits.

Cons: Can be complex and expensive to set up, requires employee engagement and financial capacity, ongoing administrative burden.

4. Family Succession (Intergenerational Transfer):

Description: The business ownership and management are transferred to a family member (e.g., children, relatives).

Pros: Preserves family legacy, often a smooth transition if the successor is well-trained, can be planned carefully over time.

Cons: Can lead to family disputes, successor may not be as qualified, sales price may be lower than an external sale, limited liquidity for the exiting partner.

5. Partial Sale of Ownership:

Description: The owner sells a portion of their stake in the business, bringing in new investment or reducing their own commitment while retaining some control.

Pros: Provides capital infusion, allows the original owner to stay involved, reduces workload.

Cons: Dilutes existing ownership, requires careful management of new investor relationships, may lead to future conflicts regarding control.

B. External Exits (Selling the Business to an Outside Party)

These strategies involve selling the entire business to an entity outside the current ownership structure.

1. Sale to a Third Party (Strategic Buyer or Financial Buyer):

Description: Selling the entire business to an unrelated individual, another company (a strategic buyer), or a private equity firm (a financial buyer).

Pros: Often yields the highest financial return, provides a clean break for the exiting partners, can infuse new resources and expertise.

Cons: Can be a lengthy and complex process, requires due diligence from both sides, potential disruption to employees and culture.

Strategic Buyer: A company that wants to integrate your business into its own operations (e.g., a competitor, a supplier, a customer). They often pay a premium for synergies.

Financial Buyer: An investment firm (like private equity) looking to acquire, grow, and eventually resell your business for a profit.

2. Merger or Acquisition:

Description: Combining your business with another company (merger) or being acquired by a larger entity.

Pros: Can provide significant growth opportunities, expand market reach, and access new resources.

Cons: Loss of control, potential culture clashes, integration challenges.

3. Initial Public Offering (IPO):

Description: Selling shares of the company to the general public on a stock exchange. This is typically only an option for large, well-established businesses.

Pros: Can raise substantial capital, provides liquidity for owners, increases company profile.

Cons: Extremely complex, expensive, subject to market fluctuations, increased regulatory scrutiny.

C. Dissolution and Liquidation

These are typically last-resort strategies when the business is no longer viable or partners cannot agree on a more favourable exit.

1. Voluntary Dissolution/Wind Down:

Description: The partners mutually agree to close down the business, sell off assets, pay off debts, and distribute any remaining proceeds.

Pros: Avoids protracted disputes, can be a planned and orderly process.

Cons: Business ceases to exist, may not yield significant financial return, requires careful handling of legal and financial obligations.

2. Liquidation (Asset Sale):

Description: Selling off the company's assets individually rather than as a going concern. This often occurs when the business is failing.

Pros: Can recover some value from assets, simplifies the winding-down process.

Cons: Typically results in a lower return than selling the entire business, often associated with financial distress, can be a negative perception.

3. Bankruptcy:

Description: A formal legal process where the business's debts are managed or discharged under court supervision.

Pros: Provides relief from debt, a chance for a fresh start (for the partners).

Cons: Significant negative impact on reputation and credit, loss of business, often little to no return for owners.

Key Considerations for Any Exit Strategy:

Partnership Agreement (Buy-Sell Agreement): This document is paramount. It should anticipate and define how any of these exit scenarios will be handled. Without it, disputes are much more likely and costly.

Valuation: How will the business or the departing partner's share be valued? Agreeing on this beforehand is critical.

Tax Implications: Every exit strategy has different tax consequences for both the departing and remaining partners. Consult with tax professionals.

Legal Counsel: Always involve lawyers experienced in business law and partnership agreements to ensure all legal obligations are met and to protect your interests.

Timing: Planning an exit strategy early can significantly increase the control you have over the process and the value you derive from it.

Legal counsel for partnerships and joint ventures therefore must facilitate the realization of optimal profits within a legal framework that lawfully protects the business participants. This is essential to maximizing your Canadian partnerships and joint ventures, for it provides important assurances that will enable the business to move forward with confidence while limiting future infighting and breakdowns of the business relationship. For legal counsel as to your business partnership or joint venture, contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

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Partnership Exit Strategies. Although a business partnership at its inception may only evince confidence and favorable financial projections, over time this positive perspective can all too quickly disipate, such that one or more of the partners might become disillusioned with its future and the partner's involvement therewith, such that its important to consider partnership exit strategies. Hopefully, those exit strategies have been previously set out in a written partnership agreement at the outset of the commercial venture. Read more.

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