Many entrepreneurs may not realize that just because their partnership is forged with the best intentions does not mean it will stand the test of time. The truth is that even the most promising partnerships can be marked by disagreements, challenges or unexpected circumstances that may necessitate an exit.
Entrepreneurs can greatly benefit from coming together to pool resources and join efforts in business management. However, it may reach a time when the discord in a partnership outweighs the coordination. This is just one reason why every partnership agreement should have a well-defined exit strategy.
An exit strategy is crucial
Every business partnership should include a clear roadmap that outlines the process and conditions under which partners can:
- Leave the business
- Sell their shares
- Dissolve the partnership altogether
Without a clear exit plan, the business could face significant challenges, including:
- Financial losses
- Legal disputes
- Damaged relationships
A well-structured exit plan can also help partners achieve a common goal even at the end of their collaboration journey. For example, provisions for the procedure a partner can follow if they want to sell their share can protect the business from potential disruptions.
Without an exit plan, a partner’s sudden decision to leave the business could trigger operational challenges, such as finding a replacement or dealing with the financial implications of buying out the departing partner’s share.
Sometimes, promising partnerships can come to an end due to unexpected events, such as:
- A partner’s terminal illness
- A partner’s death
- A partner’s significant changes in personal circumstances
An exit plan is equally important in these scenarios because it allows entrepreneurs to acknowledge that life is unpredictable. When unforeseen circumstances force a partner to leave the business, having a plan in place helps ensure that the business can continue to operate smoothly.
Elements of an exit strategy
Entrepreneurs can use appropriate legal guidance to clearly define the circumstances under which a partner can exit the business. This could include:
- Voluntary resignation
- Retirement
- Death
- A breach of contract
Specifying these conditions helps to avoid ambiguity and helps ensure that all partners are on the same page.
Entrepreneurs who are thinking about entering into a partnership should consider including an exit strategy in their foundational documentation. With the appropriate legal guidance, partners can help ensure that their exit strategy protects the business from potential disruptions and that all partners are treated fairly in the event of a departure.