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Removing a partner when there is not enough capital for a buyout

 

There are many ways that a business partnership can fall apart and having a contingency plan for how to treat each partner equitably if that occurs can save both parties massive headaches before they have the opportunity to arise. Even though most individuals who enter into partnerships do so because they believe that the other person will be in it for the long haul, it is always wise to prepare for how you will treat your partner fairly if the business or the relationship does not last as long as you had both anticipated.

If one partner desires to leave the partnership and the other partner(s) do not have the capital on hand to execute an ideal exit strategy or would prefer to not sell the business, there are some other options for fair compensation. One such option is attempting to attract an investor to replace and compensate the exiting partner.

 

Structuring the investor’s role is crucial to success of these kinds of maneuvers, but can reinvigorate the business in the process. To attract an investing partner, it is wise to begin with a business plan that demonstrates the potential trajectory of the business to the investor. The investor should be agreeing to take on both some debt and some equity in the business. This allows the investor to acquire a stake in the business and also to be repaid with interest over time. In this way, a portion of the investment capital may be designated to pay the exiting partner due compensation, and the incoming investor can assume some of the responsibilities and benefits left by the exiting partner.

A good partnership is built on both strong personal relationships between partners and a well crafted agreement that anticipates problems and remedies them before they arise. The guidance of an experienced attorney can help you craft the ideal partnership agreement to suit your needs and serve your ambitions.

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Klein & Wilson

Klein & Wilson
4770 Von Karman Avenue
Newport Beach, CA 92660

Newport Beach Law Office Map Phone: 949-631-3300
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