Liquidating A Business Partnership
When partnerships break up and a planned buyout of the business is a possibility, the partner who has lived more cautiously is likely going to end up being the buyer, while his less provident friend ends up selling. If you’re in a desirable business and have a partner with a taste for the high life, hang onto your money, and sooner or later, you’ll be offered a chance to buy increased (or even complete) control. You may as well be ready. If you are not, the firm will be sold to an outsider, partially liquidated, or run down. Stipulate at the outset that the partners are to have first chance at any shares or interests offered for sale.
In a spin-off or a partial liquidation, you reduce the size of the company so it can be run by one person. Spin-off here means splitting the business into separately owned units. If the company has two stores, you arrange each to keep one, assuming that they are far enough apart that you won’t become instant competitors. Sometimes reorganization will produce separable companies, as when you’ve done sales and service for a product, and volume in each is large enough to be self-supporting. Some cash may have to change hands to equalize the transaction, but the amount will be less than would be needed for a complete buyout.
Where neither partner has the cash to replace the other, it may be necessary to liquidate part of the business, raising money to pay off your partner by selling off assets such as real estate, a branch store, or excess inventory. Your partner keeps the profits from the sale, and you are left sole owner of whatever remains. It’s a workable solution. Just don’t let a partner in a hurry sell the wrong things at the wrong price, or give the impression that the business itself is unsound because it is closing offices or selling off merchandise.
The same problems limit the sale of the partnership, and are compounded by the fact that if your partner takes an unrealistically low price for his or her share, your share is likewise depressed in value. To prevent that, it may be worthwhile to strain your resources to buy out a troubled partner, even if you’ll have to put the partnership back on the market in a very short time at a substantially higher price. At the very least, your initial partnership agreement should guarantee your right to approve the buyer of any other partnership share.