Your Business Partner Wants Out – What Happens Next?

Starting a business together usually involves plenty of discussion about growth, customers and where the business might eventually go. What is discussed far less often is what happens when one person decides they want out.

A shareholder or business partner leaving does not necessarily mean the business needs to end. However, without a clear process, disagreements about price, control and future responsibilities can quickly turn a commercial separation into an expensive dispute.

Start with the agreements you already have

Before agreeing to anything, review the documents governing the business.

For a company, this may include a shareholders agreement and company constitution. For a partnership, there may be a partnership agreement setting out what happens when somebody leaves.

These documents can contain important provisions dealing with the transfer of shares, valuation, buy-outs, decision-making and dispute resolution. Shareholder rights can also arise under the Corporations Act and the company’s constitution or replaceable rules.

If there is no written agreement, the position can become considerably more complicated.

What is their share actually worth?

Valuation is often where otherwise amicable discussions become difficult.

The departing owner may believe they are entitled to half of everything the business has built, while the remaining owner may have a very different view about the value of the company, its goodwill or the departing person’s interest.

Rather than choosing a figure based on emotion, the parties may need to obtain appropriate accounting, valuation and legal advice.

Importantly, don’t agree to a purchase price simply because you want the problem resolved quickly. Once significant terms have been agreed, changing position can become much harder.

Don’t forget about liabilities

Buying someone’s shares or agreeing that they will leave the business does not necessarily resolve every issue.

Consider bank guarantees, commercial leases, business loans, director positions, company credit cards, intellectual property, access to systems and existing contracts. A departing owner may also remain personally exposed under guarantees unless the relevant creditor agrees to release them.

A proper exit should therefore address more than who receives the shares and how much is paid.

Try to keep the discussion commercial

Business disputes can become personal very quickly, particularly where the owners were previously friends or family members.

Where possible, separate the relationship breakdown from the commercial problem that needs to be solved.

ASIC itself notes that disputes between shareholders and officeholders of small proprietary companies commonly concern ownership, management and control, and recommends legal advice and communication or mediation as potential pathways towards resolution.

A negotiated exit can often preserve considerably more value than prolonged litigation.

What if neither party will compromise?

Sometimes agreement simply cannot be reached.

One person may refuse to sell, the parties may disagree fundamentally about valuation or there may be allegations concerning how the company has been managed.

At that point, the available legal options will depend heavily on the structure of the business, the governing documents and the circumstances of the dispute. Court proceedings may ultimately be necessary in some cases, but they should generally be approached with a clear understanding of the commercial cost and desired outcome.

A business partner wanting to leave does not need to become a business-ending event.

The key is understanding the legal position before agreeing on price, transferring shares or making decisions that may be difficult to reverse.

At EAS Legal, our Commercial Law team approaches business exits with a practical objective: protect the client’s position while looking for a resolution that allows the business and the people involved to move forward.

Sometimes the best outcome in a business dispute isn’t winning a fight. It’s finding the right way to end one.

Frequently Asked Questions