How to survive breaking up with your business partner

A relationship breakdown, especially where children are involved, creates trauma and it can also put strain on your small business.

It seems many small business owners must cope with a breakdown annually. Family Business Australia research shows there are more than 1.4 million family businesses in Australia.

Meanwhile, the Separation Guide shows a 314% increase in the number of couples considering a separation during lockdown, of whom many presumably own a small business.

Play on or sell up

Craig West, the founder and chief executive of Succession Plus, a business succession and exit planning firm, says if the business is managed well, it should have a "shareholder agreement" covering the eventuality of a personal relationship breakdown between business partners.

A shareholder agreement also covers other aspects of the business, including its funding, structure, management and direction, the responsibilities and obligations of the owners and exit planning.

West says the shareholder agreement should also include a buy-sell clause to cover the situation where one of the partners wishes to sell their share of the SME.

"The shareholder agreement will describe what happens if someone gets hit by a bus, gets divorced or gets seriously ill," he says.

Yet he estimates that only 20% of SMEs have shareholder agreements.

Victoria Devine, the director and co-founder of Zella, a financial advisory practice says: "You don't expect to get into a relationship and for it to become a legal contract. Who is going to say, 'Let's sit down and draw up a buy-sell agreement, honey?' "

A strong advocate for the value of business prenup agreements, Devine concedes that often when you're starting a small business you might not have $10,000 to set up a buy-sell agreement."

When it gets messy

For family businesses without a shareholder agreement, Devine says that, ideally, "you're not going to send the business down the drain if it's profitable. You need to work out what is best for the business."

She says there are myriad options available to owners seeking to stay in the business.

"You sort out your differences and continue to run the business together. Historically, that works for a few years, but then one party gets a new partner, and it all becomes very messy."

West adds that, realistically, they're not going to work together.

"They don't like each other and can't agree on what to do, and the business quickly gets put on the market as part of a fire sale. It'll end up being bought by some opportunistic buyer that pays nowhere near what it's worth."

Therefore, where a shareholder agreement is not in place, West says it's almost certainly time for a couple to also split commercially.

Employing a manager to oversee the business is another option aimed at keeping it afloat.

"If you can't agree, could there be someone else who comes in and manages the business? Maybe both parties could exit the business and appoint a CEO," says Devine.

No matter what decision is taken, Devine urges a separating couple to seek sound legal advice, especially where a shareholder agreement isn't in place.

"This will ensure things don't get messy and everything is documented. If you're having discussions about what should happen, it should be done in writing. Any steps that reduce friction is what I'm advocating."

Valuing the asset

If throwing in the towel is the best option, West says valuing a small business asset is complicated, especially when a relationship hits the rocks.

"You can get a property, shares and other assets valued pretty quickly, and it's easy to do. But a business is tricky," he says.

"One of the reasons it's difficult is that often in a small business, the value's attached to the individuals, the owners.

"Suddenly, you've got a problem because one of the owners doesn't run the business or doesn't know anything about it. And, therefore, the business value is destroyed quickly.

"This is why many people decide to say, 'You know what? Let's sell it. And we'll get a cheque for a $1 million and split that in half. And we both get $500,000 cash. That's fair, that's equal.' The problem is they've done nothing about preparing for sale, so they don't get $1 million. They get less."

West says couples should be prepared well before a relationship breakdown happens.

"My advice is that you should always be prepared to exit. Whether it's voluntarily selling to retire, or whether it's divorce or illness, or anything else, if you're prepared before anything happens, you'll get a far better result. No doubt about it."

Get stories like this in our newsletters.