Have you considered how your business will move forward in the event that you or your business partner have a falling out, death or catastrophic injury?

The breakdown of a business partnership can seriously impact the business, causing stress, anxiety, lawsuits and in many cases, can see the end of the business altogether.

When the time comes to end a business partnership, aside from the obvious personal and financial stresses, there are also a number of legal issues that need to be carefully considered.

Carol and Dana, the Best-Friends-Turned-Businesswomen

Best friends Carol and Dana started out their new business together with enthusiasm. In the early days, Carol and Dana worked long hours to get the business up and running, but as time went on
Dana was putting fewer and fewer hours in while Carol continued to slog away. Their relationship soured and after 3 years, Carol told Dana she wanted to sell up.

The business was running at a loss and Dana couldn’t pay Carol anything for her share of the business, but Carol was just happy to get out – the 16 hour days were killing her. Carol and Dana each
signed a one-line letter saying Carol was no longer a partner and Dana was the new sole owner of the business.

Carol’s sigh of relief was deafening. But, one year later the business came back to haunt her. Dana had racked up debts of over $100,000.00, owing money for unpaid rent and unpaid suppliers. Dana declared herself bankrupt and so the landlord and suppliers sought payment from Carol. Carol tried to rely on her one-line letter from a year ago to show she was no longer an owner of the business, but the response she received was “so what?”.

What Carol should have done

Carol needed to release herself from the lease with landlord and the personal guarantees with the suppliers when she left the business. Sadly for Carol, since she was still guaranteeing the payment of the debts of the business, she was still liable for the $100,000.00. After negotiations, it ended up costing Carol $50,000.00 plus legal costs to get out of the mess, which was financed by a new
mortgage over her home.

Instead of signing that one-liner, Carol should have:

1. Obtained legal advice;
2. Had a ‘dissolution of partnership agreement’ drawn up;
3. Ensured that releases were obtained from the landlords and suppliers; and
4. Ensured PAYG tax and superannuation contributions were up to date.

 
If you are looking to get out of a business, HKH can assist you to make sure you have all the necessary safeguards in place before you leave. Contact us today.