Can I get a Divorce from my Business Partnership?

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Not all relationships work out, whether personal or in business. Not all business partners plan for a long-term arrangement: they may expect that their business will be sold to someone else after a time. If that does not happen, the time will likely come when one member of the partnership or a shareholder wants to retire or otherwise exit the business. What happens then? Are those that want to remain in the business obliged to buy out the person who wants to leave? The answer is that they are not. Unless they have previously agreed to do so.

Success in business is often the result of careful planning. And if business owners have planned for their exit, then a partnership deed, a shareholder agreement, or other formal document should set out the terms of exit in a clear fashion. The best time to reach an agreement like that is before the business even starts trading or any time after that. And the very worst time to try to do it is when someone actually wants to go.

In a traditional partnership (not a limited liability partnership or LLP), the position is simple. If there is no written agreement that provides differently, then the partnership is simply dissolved when one of the partners leaves. During a short winding-down period, the partnership assets are sold and converted into cash which is then shared out. This can be an unfortunate result if the business has acquired a reputation that has value because that reputation or goodwill might have been sold if the partnership had negotiated to sell its business before its dissolution. In a LLP, the business will remain and the exiting partner may leave with nothing.

In a company, a shareholder can sell their shares to anyone who wants to buy them unless they have previously agreed differently. But there are usually few buyers for less than a controlling interest in a small company and there is no automatic right to have those shares bought by the company or other shareholders. This may come as a blow to a co-owner of a successful venture who wants to realise their capital. Unless they can persuade others to buy their shares or a three-quarter majority of shareholders to sell the whole business, they may have to be content to receive dividends from time to time and nothing more.

In smaller businesses, shareholders usually work in the business and provide their labour as well as their capital to promote the success of the business. For those who remain in the business on those terms, sharing profits with shareholders who are no longer working in the business can seem unfair and burdensome. It is usually in everyone’s longer term interest to reach an agreement to compensate the outgoing shareholder and buy back their shares.

Here to Help

If you are thinking about leaving a business that you co-own, our Dispute Resolution team can guide you through the pitfalls. Contact John Wiblin, Partner and Head of Dispute Resolution on 01992 300333 or John.Wiblin@longmores.law.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.