Review for Accountants & Financial Planners
October, 2016

Can you easily divorce a business partner?

Two minute scenarios...

If a personal relationship fails, and the individuals can't agree on the financial settlement, the Family Law Court will make the decision. However, when a business partnership fails, there is no equivalent solution.

Scenario One... Jessica, Tom, and Andrew

Scenario: These clients own equal shares in a successful business which they started about ten years ago. Tom has lost his enthusiasm for the business and often doesn't turn up for work. Jessica and Andrew have had to step in and take over most of his tasks.

What's the issue? Even though Tom is rarely at work, he is still entitled to his one third share of the profit. The partners don't have an agreement that allows Jessica and Andrew to force him out for non-approved long term absenteeism. Tom doesn't want to sell.

Solutions: Ideally, they would have an agreement that allowed Jessica and Andrew to force Tom out under these conditions.

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Scenario Two... Now it's Andrew's turn

Scenario: Andrew is suffering from another bout of severe depression. He hasn't been able to come to work for a few months.

What's the issue? Andrew has insurance but depression was an exclusion on the policy due to his prior mental health history. Jessica and Tom are very empathetic but they have had to cover his job while he continues to receive his one third share of profit. How long will this go on?

Solutions: The partners need an agreement that enables them to force the sale, based on an agreed valuation method, when one of the partners is no longer able to carry out their role.

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Scenario Three... but I want leave

Scenario: Jessica has been getting very frustrated with Andrew and Tom. She has some great ideas for expanding the business but they are just not interested.

What's the issue? Jessica has reached the point where she no longer wants to work in the business. Tom and Andrew are refusing to buy her out. Now what? Without an agreement that forces the others to buy her out, it will be very difficult for her to exit.

Solutions: Ideally, they would have pre-arranged a sale to cater for this possibility, via an Exit Agreement. It would have allowed Jessica to leave the partnership and be paid for her share.

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More information for clients

Please feel free to forward this insight on Buy Sell Agreements to your clients. Or if they would like to discuss how we can help them please call 03 8621 9000 or email info@irongrouplawyers.com with their details and we will contact them, obligation free.

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