Many businesses have multiple shareholders or “partners” from inception while others add them over time as the business grows. Operating successfully with multiple partners can be tricky, and when it comes time for partners to begin leaving the business, things can get complicated. Each partner needs to determine how and when they will exit the business and how much money they will receive as they transition out. This is complicated stuff.
Here are some tips for successfully navigating partner ownership transitions:
- Partner goals – Start by having an open and honest discussion about each partners’ goals related to their desired timeline and level of involvement they want to have in the business. Do partners want to step away at the same time or at different times? Do they want to work full-time, part-time or not at all as they transition out?
- Successors – Determine if it will be necessary to take on new partners as older partners begin to step away. Estimate how long it will take to train them to take over.
- Financial needs – Each partner should calculate their Wealth Gap, or how much money they will need from the ownership transition. There is no guarantee, of course, that they will receive what they need, but they need to understand “their number” so they can plan their timeline and level of involvement.
- Business value – Healthy and profitable businesses may or may not be able to pay the transitioning partners the amount they need to achieve financial independence. It will depend on what the business is worth, the total amount that each partner will receive and how much cash flow can be routed to the partners on an annual basis. This is likely to be a major point of negotiation among the existing partners.
- Timeline – The number of partners transitioning at the same time, the total amount to be paid and the annual cash flow will determine the actual transition timeline. If partners are fortunate enough to be several years apart in age, it may be possible to use the value of the company more than once on behalf of each partner at the time of their transition.
- Buy Sell, Operating or Shareholder Agreement – Be sure to review any agreements that may be in place among the partners that outline how, when and at what value partners may transition out. These agreements may, of course, be changed if a majority of the partners agree to it, but if partners are not in agreement, the current agreements will most likely have to be followed.
It is important to understand that partner transitions can be emotional events. It’s challenging enough to maintain partnerships as the business grows, but it can be really tricky to negotiate and execute on partners transitioning out. It is often helpful to hire an independent and objective advisor who can walk the partners through the discovery and decision-making process so an effective plan can be put in place while minimizing conflict.
Planning partnership transitions takes time. Start the process as early as possible and well before any partners want to completely exit from the business in order to improve your chances for a successful transition.