When Two Become One: Dissolving a Partnership
Like the splitting up of once head-over-heels newlyweds, the parting of ways in business is often tricky, sad and more than a little complicated. Add in the complexities of an all-star cheer business, and breaking up can get downright sticky.
So what happens when one of the partners of an all-star gym wants to retire or pursue other passions?
Legal experts advise not waiting until one person is ready to retire—or wants out—to discuss what will happen with your beloved gym. Business litigator Jay McDaniel, founder of the McDaniel Law Firm, P.C. says it’s imperative to think about not just getting into a business but getting out of it—especially when it comes to cash.
“The cost of not having planned for the exit as one of the principal owners of the business is usually multiples of hundreds of what it would have cost to have done it at the time,” he says.
For Freedom Athletics, Inc. founder and owner Nancy McDowell, buying out her partner in 2006 was pretty straightforward and snag-free, even though she and her partner had never discussed what might happen with the gym if either coach wanted out. At the time they started Freedom from scratch in 2003, McDowell says, “it was just bubblegum and lollipops. We were coaches. And we had all these kids and it was awesome.”
Fast-forward three years, and McDowell’s partner decided she wanted to pursue other career paths. Fortunately, she says, the gym’s attorney was a family member, so the transfer of ownership was seamless. And according to McDowell, there has never been a hint of ill will: “We have a very good relationship. She’s done choreography for me [since the split], so it worked out really nicely.”
D.S. Briggs, Tumbling Director of Metro East St. Louis-based Pride Kids Sports Center, has a different perspective on buyouts. Years ago, he was a staff member of a buyout that was initially treated like a merger so as not to lose key support from its team families and community. In that situation, the gym he was employed by wasn’t necessarily looking to buy or acquire another program, but when they were approached by another gym to join forces to compete with a mega-gym moving into the area, the merger worked—at first.
“Maybe about a year or two later, we ended up buying the program out completely [rather than being equal partners] because things had deteriorated to the point they had no option but to sell,” he says.
Briggs says to make these types of buyouts work, the new owner needs to be sensitive to just who the “old” gym was. “The gym that is taking over has to respect the client and the culture of the smaller gym,” says Briggs. “It takes time to assimilate a whole gym culture into a different culture; it can’t be rushed into or expected to survive without hard work by the perceived leaders in both gyms.”
And, as always, communication is key, says Briggs. “You have to have a lot of open honest discussion about the goals, hopes and dreams, and what really are the personal dreams and philosophies of both programs,” he explains. “You have to figure that out right from the beginning. Otherwise, it’s not going to work at all.”
And when it comes to what McDaniel calls “business divorce” (when one partner wants out), he says most business owners don’t prepare for it when they are just starting out. In his experience, only about 25 percent of his clients have given it real thought. Most, he says, find it difficult to focus on an event that could be 25 years away. “The idea is, ‘we will deal with it someday’ or ‘yeah that’s a good idea’. [They always say], ‘We’ll get back to you,’” shares McDaniel.
Avoid that trap and start planning now for a smooth exit with these helpful tips:
1. Put in agreements to buy and sell. “You come to agreements on how you are going to value the business and you put in place funding for it,” says McDaniel. “That way, the person who stays has funds to buy the other person out.”
He adds that one effective way to do that is by taking out life insurance policies on the principals of the company. With that method, if one of the co-owners dies, the business will have the proceeds of the life insurance policy to pay their family the value of their share of the company.
And when it’s time for retirement, the business will have the cash value of the life insurance policy to pay the retiring partner or withdrawing partner.
2. Incorporate a deadlock clause. McDaniel also suggests putting a deadlock clause into a well-drafted business plan, which can save a lot of heartache down the line. “It basically says that if we can’t agree, then I can make an offer to buy a proposal,” he says.
3. Steer clear of a DIY split. Things can get particularly dicey when the people splitting up attempt to do it themselves. That’s a big no-no, according to McDaniel: “Never do it yourself. About half of my litigation cases come from do-it-yourself business entities. Get a decent lawyer.”
4. Communicate, communicate, communicate. In McDowell’s case, she feels fortunate the process went so smoothly. A key ingredient, she stresses, was talking through everything from the beginning. “Be very honest and upfront from the get-go. Be very clear about what you want. And put it in writing.”