The time to develop an exit strategy is when you form your business partnership or corporation. The exit strategy is an agreement regarding business assets, debts and liability should a partner or another principal no longer be able to, or want to, engage in the business. You can avoid disputes and, ultimately, litigation by anticipating events that can put your business in jeopardy and including clear contractual language that addresses the situations.
The exit plan allows you to negotiate terms of dissolution while you and your partners are on good terms. During the early stages of your business relationship, you are more likely to cooperate and to think clearly about orchestrating an equitable resolution than when the relationship is coming to an end.
Your exit terms should plan for these potential events:
- Death of a principal – Clear succession planning installs a leader into the principal’s prior role to avoid disruption in your business. In addition, heirs to the principal’s estate may now have a stake in the company. Provisions that address payout of investment funds to beneficiaries can help your small business avoid a sudden detrimental depletion of cash.
- Divorce of a principal – Throughout the life of a small business, all principals should avoid commingling of business and marital property that could place business assets at risk should the marriage dissolve. A contract can further protect the company if a spouse claims marital interest in the business.
- Retirement – In the case of a family-owned business, your retirement may involve passing the company to a child, a grandchild or a sibling. A clear succession plan can reduce the likelihood of unpleasant infighting over who takes the helm. In addition, your retirement terms should protect your own financial security.
- Owner dispute – Your vision for your business may have changed from the day you started. If you and your partner no longer see eye-to-eye, deciding on your fair share of business equity and debts can become problematic. An exit contract guides you through the appropriate resolution to disputes.
Consult with an experienced Minnesota business lawyer about your exit and succession planning.