When Jules Taggart teamed up with Krystina Feucht to launch Kickstarter Kitchen, a provider of marketing and business coaching services for women entrepreneurs in May 2012, she thought the pairing would be auspicious based on their mutual interests, strengths, and background. Both were not only marketing experts but also former work colleagues at a prior company.
However, shortly after Kickstarter Kitchen launched, the partnership derailed. According to Taggart, the founder and owner of the San Diego, Calif.-based amp&pivot, a marketing and branding company, the rupture had nothing to do with temperamental differences. Rather, the dual culprits were priorities and profits.
“My partner and I were making enough to provide one person with a full-time income, but not two people,” admits Taggart. “Because of that, we were stretched very thin in other areas. I was still running my marketing and social media business while Krystina was still working in a corporate job full-time.”
After discussing how certain assets—in this instance, online communities and business components—would be divvied up between both parties, Taggart and Feucht ended their partnership smoothly and without legal and/or adversarial complications. In fact, the termination was so amicable that Taggart even penned a blog post on it.
Unfortunately, many small business partnerships don’t often end so harmoniously. To prevent a bitter, divisive outcome, what are some best practices that small business owners should employ when considering a parting of partners?
This might sound counterintuitive, even defeatist, for business owners on the cusp of entering a partnership they hope will be fruitful, but it is a realistic necessity. Just as a person with sufficient means might ask a prospective spouse to sign a pre-nuptial agreement as a precautionary measure, a business owner might likewise need to have a legal document drawn up that will equitably divvvy up the assets and profits of a business should a split be necessary.
Mark Chatow, founder and principal of Chatow Law, a legal firm based in Newport Beach, Calif., strongly endorses this takeaway. “By planning ahead, partners can agree to fair and reasonable ways to part as friends-- before things get emotional,” he says. However, things can get dicey if one partner wants to remain with the business and buy out the other’s stake in it. Charnow, a business lawyer who has helped many small to medium sized businesses (including some of his own) legally terminate partnerships, points out that the partner who is staying, might “want to pay less to buy out the partner who is leaving than that partner feels their ownership is worth.” If the business is a startup or still in a nascent stage of development and has not yielded profits, it can be problematic trying to put a “fair value” on the business.
Chatow suggests that both partners should agree ahead of time on a price they can invoke to buy out the other. At the same time, the other should have “a first right of refusal” to buy the other partner instead at that price.
“This forces the partner who is staying to offer a fair price for the buy-out or to risk getting bought out themselves,” notes Chatow. “The same process can work after the fact even if it wasn't part of the original partnership agreement as long as both partners are willing to use it.”
Take stock of your emotional attachments
If you don’t have a dissolution agreement with your partner, then Taggart advises the small business owner to have an honest and “uncensored” conversation about the areas in his/her business that he/she feels an affinity for. For example, this can be clients that a small business owner has carefully cultivated or programs for which a small business owner has developed proficiency.
“Once you figure out where you feel attached, you can determine the areas where you’re willing to let go in order to get the things you really want,” says Taggart. In Taggart’s case, it meant her taking ownership of an online community, Thrive Hive, which both she and her former partner built from the ground up.
“This is a community that earns a little bit of money each month but not enough for either of us to get wrapped up in the outcome,” she reveals. “We are both tied to this community emotionally, though. In the end, we decided that it made more sense for me to continue to run Thrive Hive instead of Krystina because the community of women entrepreneurs is the same target market I’m trying to reach with my other company, amp&pivot.”
Use a mediator
Sometimes an impartial third-party, such as a judge or attorney with experience resolving partnership terminations, might be crucial to keep the process of business divorce from running into snags. This is key if one partner finds a loophole in a dissolution agreement. Having a person at the table who has no vested interest in either side can be a great way of quelling potential snarls.
Says Chatow: “Mediation is accessible to small businesses, much less expensive than arbitration or court, and can potentially turn an ugly business breakup into a friendly parting of the ways.”
Make sure everything is accounted for
This means before you end a partnership, it’s imperative that all debts and taxes be paid, insists Chatow. Even if you and your partner have had an amicable parting of the ways, the penalties that can occur if creditors and government agencies have not been dealt with can quickly trump the peace and turn the process stressful. Be responsible and make sure there are no dangling liabilities. Wrap up your business with the same care and caution you exercised when you launched it.
To bolster his point, Chatow cites the following example. “I recently worked with a small business that had failed to dissolve their corporation when the business was no longer active,” he recounts. “One partner assumed that the other had taken care of everything but they had failed for years to file a simple $25 a year document with the state called a ‘Statement of Information.’ We were able to get the non-filing penalty down to just one year at $250 rather than the multiple years it could have been. But that's not always going to be the case. Fortunately, they had paid all but the current year's taxes so they were just liable for $800 in taxes plus a relatively small penalty that had accrued.”
Ending a business partnership can be a trying, emotionally-fraught undertaking. But if proper procedural care is taken both before and during the process, then parting ways does not have to be as unpleasant as it might otherwise be.
Disclaimer: The opinions expressed are solely those of the author and interviewees. You should consult a qualified professional to assist you in determining the most effective business partnership arrangement for your business.