How to Get Out of a Bad Business Partnership

Pejman Ghadimi — November 15, 2016 Follow @secretentourage

Partnerships are hard and finding the right co-founder can be a pain-in-the ass that stays with you for quite some time – especially if you pick the wrong one. In many cases, people come together with a common vision, diverse skills, and the idea that a road traveled together will be easier than a road traveled alone. In some cases, as time goes by, the dynamics of the business change and the vision gets altered based on each individual’s circumstance, which as a result creates a partnership that turns into a complete nightmare.

However, the problem is that in most cases, your partner has equity in the business and if you were stupid enough to give over 20% of the equity, then you may have created a significant problem for yourself as your co-founder now has equal voting rights and a real stake in the business.

So How Can You Conveniently Kick Out Your Co-Founder and Continue to Move Forward?

Here are three main things you may have to consider as a possibility when it comes to kicking them out, assuming they have real equity, and not just a promise of equity. If they in fact signed the dotted line, then read on…

1. You Have to Buy Them Out.

This can be painful depending on how much revenue your company is making. Most people will usually say that a person’s worth is 12 months of revenue X their percentage of ownership as a buyout figure, but again this can be argued based on the growth the company is having year after year. Bottom line is, that if you are making money, getting rid of a co-founder will include having to get a lawyer to hash out the $ figure it’s going to cost you to get rid of them.

I have personally seen co-founders walk away with a lump sum of $ 3 million dollars on a company making $ 10M in revenue, even though they were hurting the business more than helping it. At the end of the day, it’s better to get rid of a bad apple earlier as the future is at stake and a one-time payment isn’t that bad if you have a good game plan and know where you are heading.

In the case that your business is not making revenue, then the tables are reversed and the investment made in the business isn’t worth its full face value, unless the business is showing significant growth outside of revenue. If your co-founder invested $ 20,000 but your business has yet to grow, an option is to simply offer them a 50% buyout or even less depending on how their investment impacted the business.

2. You Give Them a Royalty Based On A Certain Number of Months or Years.

Another option, especially if your co-founder was involved in creating a product or service, could a be a royalty deal. This works almost as if they never were part of the business but helped collaborate and therefore are entitled to future sales regardless of whether they helped generate them of not.

I once knew an entrepreneur who had built a SaaS based business and the co-founder was actually the genius behind the technology. While the founder was pushing hard, the co-founder and main producer of the technology simply had a change of heart. The founder saw that as an opportunity to pay a royalty of 10% of net sales for life to the co-founder if he stepped down. Since he didn’t want to be there and the product was already built, it was a win-win all the way around.

3. You Walk Away and Start Fresh.

This is in the case of very early start ups when no brand loyalty or following exists yet, and no product or revenue has been created. Since it’s early enough, you can both choose to give up the name of the business and simply start fresh on your own. If you are encountering a difficult partner in the very early stages of your business, then perhaps you didn’t analyze your situation enough and didn’t pick the correct partner.

The road to entrepreneurship is hard and full of obstacles and headaches which will require quite a bit of support. If you are not getting that support early on, cut your losses and walk away now.

Some Important Tips to Remember When Terminating a Partnership:

Create a legal document with terms agreed upon and whatever you do, do not take each other’s word for it.

Do not feel bad. Similar to terminating an employee, keep in mind that if you have done a great job trying to make the partnership work, and it still isn’t working, then perhaps it is best for both parties to part ways. Do not feel bad for your partner and do not feel generous. Be fair to each other.

Do not approach your co-founder with anger or threats. Similar to a divorce, parting ways can be messy especially if both parties sweat together in the growth stages of the business. Having a clean and reasonable break up is the key to the survival of the business. I highly recommend coming to terms from a calm and educated place, not an emotional one.

Ensure that if technology, or proprietary information is held by both parties, that clear guidelines be established as to what is allowed to be used or shared past the partnership. The last thing you want is your co-founder starting their own business and becoming your competitor using your technology or product.

Don’t back out of the split up. Too often do we feel compassionate and decide to give things one more chance. In business, your first gut feeling is often the right one. If it has already led you to think about breaking up, then stay the course and go through with it. While the initial stages may be difficult, the long-term survival of your business depends on it.

The last thing to consider is that the best way to not deal with a bad partnership is to be selective on who you choose to partner with and to what degree. Most partnerships that are started on the basis of the fear of going through the journey alone rarely make it through the hard times.

On the other hand, partnerships founded on common values, belief and vision, while being sharpened by different skills and resources allow for long-term prosperity.

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