When a Partner Leaves

Floral Finance®

Partners can bring much strength to a business — especially when the partners have complementary skills. So what happens when one of the partners leaves the business?

There are real advantages to a business partnership. In the flower business, one partner is often a designer and the other is more sales or management oriented. The division of responsibilities is easy.

Two people also can bring more contacts to the business than a single individual — more potential customers, suppliers, business professionals or sources of capital.

Beware the Pitfalls

Despite their obvious advantages, partnerships create enormous potential problems. The first and largest one is that the individuals' respective desires and goals can change over time.

These changes can affect work habits. It is all too common at some point for one partner to feel the other one is not pulling his or her weight.

The second common partnership problem occurs when one of the partners leaves or becomes ill and is unable to continue working. In the worst case, a partner's temporary absence becomes a permanent one due to death or permanent disability.

No matter why or when the partnership dissolves, you must be prepared to deal with the consequences. Sooner or later all partnerships will end.

When it Happens

Surprisingly, a partner's departure due to illness or death can be the easiest transition. Once the issue of grief is handled, things tend to go rather smoothly.

When a partner leaves due to a conflict over roles or goals, however, it can be as messy as a divorce.

Either way, there are several major issues the remaining partner must address.

How Will the Work Get Done?

It is not unusual for the surviving partner to simply take over the responsibilities of the departed partner by working more hours.

This is, at best, a short-term solution. No one can work two jobs forever. Sooner or later, you or your family will burn out.

And then there is the issue of skills. The partner who remains often does not have the skills to fill the empty shoes. After all, complementary skills probably brought the partners together in the first place.

If you're in this situation, you must quickly identify who can take over the departed partner's responsibilities. It could be a present employee. Or you might have to hire someone for the position.

The more quickly the new person is in place, the greater the odds of the business surviving. You will be able to continue to perform your original duties, and the business won't suffer from the other partner's responsibilities not being met.

Is There Enough Money?

The next issue is a financial one. Is there enough money to see the business through the transition?

If your business has been profitable all along and you have kept an appropriate amount of capital in the business, cash flow should not be a problem.

However, if the business is marginal, there may not be enough money to hire an appropriate replacement.

Many businesses have key-man insurance. In the event of death or disability, the insurance pays off and infuses extra cash into the business.

Some partners also carry life insurance to protect their business in the event of a partner's death. Either type of insurance can be funded as an operating expense of the business.

And Then There's Ownership

What do you do about the departed partner's ownership share of the business?

If your partner dies and the business is set up as a partnership or corporation, you will have to work with whoever ended up with your partner's assets.

A widowed spouse might insist on receiving half the profits or even expect to take over the vacated position. However, writing those checks each month could get old. And the spouse may not be qualified to work in the business.

The solution to these potential headaches is to have a buy-sell agreement worked out while the partners' relationship is good and intact.

You can include in the agreement various scenarios under which the buy-sell kicks in — death, disability for more than a specified time, or one partner's desire to leave.

The agreement will have to specify a method for placing a value on the business. The price should probably be based upon gross revenue, profitability and net assets owned.

Getting an independent valuation from a source such as a CPA or business valuation firm will help. In the floral industry, Floral Finance Business Services provides this service.

One, Two, Three . . . Draw!

One of the simplest buy-sell agreements to write and execute is called "The Texas Shoot-out."

Either partner (or heir) can decide at any time that they want to end the partnership. They make an offer for the other partner's share.

The other partner can either accept the offer or buy out the offering partner under the same terms that were offered.

The offering partner doesn't know, when making the offer, if he will end up buying out the other partner or being bought out. Consequently, he will be very careful to make a fair offer.

The only problem with "The Texas Shoot-out" has to do with assets. If one partner has a lot of cash and the other one doesn't, the one with the cash can take unfair advantage by making a low cash offer, knowing the partner is not in a position to buy him out.

Consequently, for partners with unequal wealth, it is a good idea to include payment terms in the agreement.

Stalemate

The point of a buy-sell agreement is to avoid a stalemate that ends up in court. Without such an agreement, a 50-50 partnership is a nightmare waiting to happen.

One florist called Floral Finance Business Services last year with this very problem. His mother had left the business 50-50 to him and his brother. She thought she was being fair.

One brother didn't want to work but did want half the profits. What's more, he refused to sell his half interest in the business.

The ensuing years totally ruined the relationship between the two brothers.

If you must operate under an equal ownership arrangement, have a buy-sell agreement that either party can execute, or give a 1 percent voting ownership to a trusted, independent attorney or CPA who can break any deadlocks.

If There's No Plan

What if it's too late? You don't have a buy-sell agreement, and your partner just left. What can you do?

A lot depends upon how cooperative the former partner or his heirs are. If they're not very cooperative, you're probably headed for court. One solution may be to sell the business… immediately.

Business brokers can be a big help here. First, they can usually place a fair value on the business. Second, they can often find a buyer who is interested in the partner's share or the business as a whole.

One thing to remember: a business can lose its value in a very short period of time, especially a flower shop that is experiencing low sales and profitability.

If you know that the business must be sold, do it as quickly as you can. And run it as profitably as possible until you do.

It's Better to Plan

Some individuals don't want to talk about one of the partners dying or leaving. It's too uncomfortable.

The issues won't go away. And, most likely, they will be even more difficult to deal with later on. The best way to handle it is to force yourself to sit down and do it — the sooner the better.

The challenges surrounding a partner's departure are important — and potentially expensive. Don't ignore them until it's too late.