Author Geoff Hazlewood

Issue September 09

Pub EADT

New relationships, whether business or personal, are often entered into in a flurry of enthusiasm and excitement.  Surely, only an arch-pessimist would already be thinking about the break up?  That might be true with a personal relationship (although pre-nuptial agreements are here to stay) but in business relationships, it is vital to have one eye on the exit route.

There are many reasons why a business relationship can turn sour but it commonly comes down to the division of ownership and corresponding levels of contribution, which can be tricky when different partners bring different things to the table.   Other factors can include differing strategies, work ethics, management styles and personalities.

A sensibly worded shareholders’ or partnership agreement should set down a fall back solution where it is otherwise impossible to agree a way out.  Proper exit provisions in either agreement would normally provide that the leaving party’s share is valued and sold to the continuing party; alternatively the business can be dissolved.  Where a party is leaving due to some kind of misconduct, it is not uncommon for the agreement to apply some kind of discount to the valuation.

Where there is no shareholders’ or partnership agreement, the exit can be very difficult.  Emotions will often be running high and points of principle often become massive obstacles to any exit deal.  When business relationships get into trouble, it can be difficult to see the end approaching and to decide whether to persevere and make things work or bring things to an end.

Once it has become clear that the relationship cannot continue, it is important to move quickly to avoid the situation getting worse.  Each party should be clear about their objectives from the start and not try to win arguments, which have led to the breakdown in the first place.   Using a disciplinary and grievance procedure has its uses in an employee/employer relationship but it is unlikely to help resolve ownership issues.

If the relationship has completely broken down, it may be necessary to communicate through a third party, possibly a lawyer or accountant who can then go on to help resolve ownership and valuation issues.  The key is to avoid accusations and recriminations, which often only serve to fan the emotional flames, and negotiate an orderly and swift exit.

Agreeing exit terms, possibly including deferred payments and restrictive covenants is itself a difficult task.  The exiting party may be giving up their sole income whereas the continuing party may be unable to buy out the exiting party in one go, or may be reluctant to do so if the exiting party is going to set up in competition.

Geoff Hazlewood,
Solicitor

Corporate Department

Tel: 01284 762331

Published with kind permission of the EADT.

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