The steps when a partnership breaks up in an economic downturn and money is tight is different to what happens when everyone is flush with cash.

The COVID outbreak of 2020 forced the Australian economy into a recession for the first time in over a decade. While we have always seen the pendulum swing back in the past, some businesses haven’t been able to survive the financial pressure caused by the virus outbreak. 

Losing a business is always devastating but it can be particularly stressful if your business is a partnership. What happens when a partnership breaks up in an economic downturn and money is tight is different to what happens when everyone is flush with cash.

If you’re in a partnership which is currently travelling ok, it’s a good idea to spend some time reviewing it so you can prevent it from breaking down in this period of economic uncertainty. 

If you are facing a partnership breakdown while the economy is shaky, there are some important things to consider. 

Protecting yourself from a partnership breakdown

To make sure things go your way in the event of a partnership breakdown, check your partnership agreement or shareholder agreement. It should be watertight and written with the worst case scenarios in mind. 

For example, what happens if (heaven forbid) a partner passes away? What is the plan to cover losses should the business become insolvent? Who has the authority to make final decisions and how will disagreements be resolved?

You should also decide on how the business will be valued in the event of a partnership breaking down and one member buying the other out. For example, with a real estate agency, would the rent roll be valued based on historic data and numbers or current rental income and commission rates? Different valuers have different ways of determining the value of a business or a rent roll and each approach can result in very different outcomes. 

Take a look at the best way to value a rent roll.   

Even though there is a lot going on right now, it makes sense to revisit your partnership agreement. Make an appointment with your lawyer to go over responsibilities, valuation processes and exit scenarios. 

Taking these steps is in the best interests of all parties. Once you’re in agreement on everything, you may find it easier to move forward with decision-making and planning for the future. 

Exiting a partnership during an economic downturn

If you have decided you don’t want to continue in your business partnership or if the business can’t keep up with its financial commitments, your first step should be to request the support of a third party moderator to negotiate the terms of the split without the need for lawyers to be involved. 

In a perfect world, you will have a strong contract in place which makes exiting less stressful. Even if you don’t, aim to agree on how the business will be valued before you call someone in to take on this task.  

Should a moderator be insufficient to support you through the breakdown of a partnership, you will need the help of a lawyer. Unfortunately, this can be an expensive process, however the lawyer will work on your behalf to ensure you can exit the business and keep what you are entitled to.

The importance of business valuation

It’s worth noting how important your valuation process is, especially during an economic downturn. While things are going well, it can be easy to value a business or rent roll based on current conditions. However, in the event of a temporary downturn, historic data may actually be the best to rely on. 

For example, if your business has noticed a downturn of 20 per cent after five to ten years of your income steadily increasing, you may be able to work with a valuer to estimate its future value based on past success rather than what’s happening right now. 

Ideally, everything will be covered in your partnership agreement so you aren’t scrambling to make decisions under pressure. As a result, exiting your business at any stage won’t be a highly stressful experience. 

BDH Solutions are rent-roll agents with over 30 years experience in connecting the right vendor with the right purchaser. Download our information booklet on the new Victorian Minimum Living Standards Legislation