Our OFRM lawyers Business Law team frequently work with clients ending a business relationship. Sometimes this can be planned, such as a retirement, but more likely it is unplanned and unexpected – at least for one side!
Either way, there are common factors that arise, which could be avoided.
Issue 1: Nothing documented for how to end the relationship
If your partnership agreement or company constitution doesn’t clearly set out how to end, there are limited ways you can remove or expel a business partner and it can get messy.
For companies, you cannot force someone to sell their shares (unless you agree) or you obtain a court order. If there has been a falling out between people within the business, often that is not a legal justification for forcing one person to buy another person’s share in the business.
Solution: Ensure you have a documented exit/buy-out option: a mechanism that triggers when certain events occur, or a provision to reduce a partner’s equity if there’s misconduct.
Issue 2: No clear process for valuing equity
The most common issue we see is disagreement about the value of the business or a partner’s equity. There are many different ways to value a business. Without a clear guide, partners may be forced to call on the Court to determine the value of the business.
Solution: A good ownership or partnership agreement should set out how valuation works, when it happens, and how the payout is made.
Issue 3: Disagreement on timing of buy-out
A sudden business breakup may mean that the remaining partners do not have available cash to buy-out a partner, and want to pay this by installments. The leaving partner then takes the risk about whether they will be paid, when or at all.
Solution: ‘Cash in the bank’ is the most straightforward path. Agreements should address what happens if immediate payment isn’t possible, such as arrangements for payment by installments, guarantees and so on.
Issue 4: No backup plan: buy/sell insurance
In some instances a death or permanent disability is the tragic circumstances effecting business ownership.
Having life or total and permanent disability insurance to cover these situations can avoid cashflow problems and sort out the departing partner’s interest quickly, ensuring a smoother exit and relief of any financial pressure at a difficult time.
Issue 5: Non-competes, staff and client issues
Once someone exits, especially after receiving full payment, there’s often concern from the remaining partner/partners about them starting up in competition, or ‘poaching’ clients or staff.
Without prior agreement, there is nothing stopping a former owner from doing this.
Solution: Including non-compete clauses or “claw back” provisions in your agreement can help ensure fairness. For example: reducing the buy-out amount if certain revenue goals aren’t met, or restricting competitive activities for a time.
How to avoid these pitfalls
Here are some practical steps you can take before things go wrong:
- Get a good ownership, partnership or shareholder agreement drafted from the start, covering exit triggers, valuations, payments, non‑competes.
- Review your agreement annually — businesses change, circumstances change.
- Make sure your exit/valuation provisions are realistic: what you think you’ll be paid (or can pay) should match your finances.
- Set up the necessary insurance and guarantees.
- Document everything clearly: roles, responsibilities, what happens if someone leaves. Clear expectations help avoid misunderstandings.
If any of this rings true for you or if you’re in the middle of a business breakup and need help, OFRM Lawyers is here.
Our Business Lawyers can review or prepare your agreements, help with valuations, negotiate buy‑outs, and put in place protections.
Call us on 03 5445 1000 or book online.
