David Pitlyuk

Two of my businesses are setup as an LLC partnership, ActiveTuning and Tri Megatech. When I was in the process of setting up these businesses, it was important to look at the exit strategy and terms if things were to go awry. Nobody wants to think in negative way, but it is something that needs to be done as a precautionary step if anything. At the least it will force you and your partner to think about certain scenarios that you would have never thought of, and make pre-determined decisions as to what needs to be done.

I just went through this process with Tri Megatech back in late 2006, and some of the main bullets that we thought about were:

• Money/Stock: How do the funds get split up? How does the percentage of ownership get sold back to the business or shareholder(s)?
• Flow: What happens to working relationships with vendors, clients, customers, etc?
• Responsibilities: Where does the responsibility for certain tasks fall?
• Time Frame: What sort of time frame would the above have to be completed by

Money/Stock

We had to think about what happens to the money that was initially invested into the business, the money that the business had, and how much the business was worth. I would obviously need to be paid back my investment, as it was considered a loan to the business. Technically I own 50% of the business, so I should be getting 50% of the cash that the business has at the time of leaving. The company should have its overall value assessed, including the cash that is on-hand. 50% of the assessed value should be mine, and should be paid back in the terms that are set.

Flow

There needs to be terms about what the process of working relationships with clients, customers, and vendors will be. If I am the partner leaving, I may represent or be the point-of-contact for many people. It should be my responsibility to provide the information to my partner so that he can rightfully take these contacts over. There should also be non-compete terms in the initial agreement to specify whether or not the leaving partner can start a competing business or not. If I could technically start a competing business, it should be specified how those relationships can be used. If these terms are not specified, I could move over all of the clients to my new business, essentially screwing over my business partner.

Responsibilities

If I am the leaving partner, what responsibilities do I have to keep doing, and for how long?  Who will take over my old responsibilities?  One of the main ideas of creating an exit strategy is not screw over the partner that is remaining involved with the business.  Your plan should involve the most fair methods for dissolving your portion of the business.

Time Frame

Time frame is one of the most important parts of the exit strategy.  In relation to finances, it needs to be pre-determined what amount of time is needed to pay the leaving partner off.  More than likely a business will not be in a position to just pay somebody a large percentage of their value right away.  The business is used to running things a certain way with certain expenses, and it may be detrimental to give up much of its funds at one time.  A plan to pay back over time is more than likely a must.  In our situation, we decided to pay the leaving partner over the course of six months.

The same goes for responsibilities.  The business may have to hire additional employees in order to pick up the responsibilities that the leaving partner held.  This takes time, and it may be necessary that the leaving partner continues to complete some of his roles.

This is a high-level look at some of the things you need to think about when entering a partnership agreement.  I would highly recommend doing further research in order to write-up a complete contract before you go into business with a partner.  Here are a few resources to help you along your path:

• Forming an Alliance?  Plan for Breakup
• Top 10 Mistakes Businesspeople Form When Forming Partnerships
• The Four D’s Of A Business Exit Strategy
• Succession Strategy: Plan in the Beginning or Risk Losing in the end