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When you go into business with a partner, there’s a number of scenarios you need to be prepared for. Chances are you’ve picked someone you trust and want to go into business with. Most founders don’t like to think about it, however, there may come a time where one partner wants to leave.
When this happens, it’s important to come up with a solution that is fair to all parties involved.
In this article, we’ll go through the options you have when you want to get rid of a 50/50 business partner, and what legal documents you may need at the beginning of the business relationship to ensure this process runs smoothly should it ever arise.
Ending A Partnership
There is no simple solution or quick answer to ending a partnership. How the partnership will end depends on a number of factors, including the circumstances surrounding the partner leaving, how the business is set up and whether there are any legal agreements in place that can impact this.
You might want to consider going for a Co-founder Separation Consult to get expert legal advice on how to proceed.
How To Get Rid Of A 50/50 Business Partner In Australia
When a partnership is 50/50, there can be a number of reasons a partner may want to leave (in some circumstances, they may not have much choice).
As we noted above, there is no easy trick to simply let a partner go (though there is usually a letter of termination letting the other partner know of their intention to end the relationship). Most businesses have their own internal documents or procedures that will impact a partner leaving.
Whatever scenario you’re in, it’s really important to make sure you go about doing things the right way so you don’t end up running into any trouble later on.
Consider factors such as informing your investors, letting employees know what is going on, sorting out your legal agreements and thinking about how business matters will be handled moving onwards from here.
When one partner leaves, you will also need to notify the Australian Securities and Investments Commission (ASIC) within 28 days of the change occurring. Letting ASIC know of a partner leaving can simply be done online through your account.
Do I Need A Partnership Dissolution Agreement?
Yes, it’s highly recommended that you get a Partnership Dissolution Agreement if you are ending your partnership. The same way it’s important to have an agreement between partners when you begin a business relationship (we explore this in more detail below), it is equally important to have a legally binding record of everything when the partnership ends.
A Partnership Dissolution Agreement can make sure you remain protected as the business winds down or one partner leaves.
It covers matters such as:
- The valuation of the business
- What liabilities each partner is released from
- Confidentiality
- Warranties
- Conducting business matters up until the date of the partnership officially dissolving
Why You Need Strong Contracts
The best solution is to be prepared for this situation, should it ever come up. It can pay off (literally) to have these difficult and somewhat awkward conversations at the beginning of your partnership rather than running into an issue you have not prepared yourselves for.
In order to give your business’ future the best chance possible, you need to have the right legal agreements in place. A strong contract can be the difference between a messy dispute and a smooth exit – let’s take a look at some options below.
Co-Founder Agreement
A co-founder agreement is the agreement between the two partners in a business (also known as a Founders Agreement) where they set out the terms of their partnership. This can be catered specifically to your business and covers matters such as:
- The equity each partner is entitled to
- The task and responsibilities of each partner
- The decision making process
- Dispute resolution
- What happens when on partner wants to leave the business
Having all of these matters covered in writing can save you a lot of negotiating and sorting through documents later on, so it’s worth having one drafted!
Founders Term Sheet
A Founders Term Sheet is the rough draft of the agreement before the actual agreement. To elaborate, a Founders Term Sheet sets out the key points the founders of a business have discussed and agreed upon. Everything is recorded into the document and then reviewed.
It’s important to note that the term sheet itself isn’t necessarily a legally binding agreement.
Once the founders have reviewed their term sheet and are happy with it, the same terms can then be put into a proper and legally binding agreement. For example, it could be incorporated into a Shareholders Agreement.
However, this doesn’t mean that they’re the same document! A Term Sheet is a pre-contractual document to the actual legal agreement, which (in this scenario) is a Shareholders Agreement. We’ve written more about the key differences between a Term Sheet and a Shareholders Agreement, as it’s important not to confuse the two.
A Shareholders Agreement is essentially the formal agreement between the founders (as they would also be shareholders), and it sets out rules around how shares will be allocated, valued and what happens if a shareholder wants to leave.
Building A Strong Co-Founder Exit Strategy
As we mentioned above, being prepared and having the right documents in place can make things a lot easier when one co-founder decides they want to leave the business.
Even more so, a strong Co-Founder Exit Strategy is a useful way of sorting through your possible options when someone decides they want out.
The exit strategy can help the person leaving cash out, as well as the one staying remain in the business.
There are multiple ways to go about deciding on an exit strategy. This can include:
- Selling the business
- Going public with the business
- Business mergers
The kind of strategy that is right for you will depend on your business and individual circumstances. It’s best to talk to a legal expert to come up with a solution that can protect the interest of all parties involved.
Key Takeaways
When a business partnership is ending, it’s best to get ahead of it with the right legal documents or consult a legal expert to help you navigate through it. To summarise what we’ve discussed:
- Partnerships can end for a number of different reasons
- Getting rid of a partner will depend on your business and circumstances
- It’s important to have a partnership dissolution agreement in place when ending the partnership
- Strong contracts at the beginning of a partnership can make one partner deciding to leave in the future a much easier process for everyone involved
- It’s also worthwhile building a strong co founder exit strategy
If you would like a consultation on getting rid of a business partner, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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