RSM Australia

Avoiding the pitfalls of a partnership breakdown

We are all familiar with the old saying, “if you fail to plan, you plan to fail”.

A business partnership is no different to any other relationship - it consistently needs to be nurtured, reviewed, amended, acknowledged and appreciated. Partnership breakdowns are no different to any other relationship breakdowns. They need to be managed effectively to minimise exposure to risk, legal and accounting costs and keep mental wellbeing in check. Good business relationships don’t happen by luck or chance. It takes an innovative, imaginative, organised and disciplined approach combined with good old-fashioned hard work.

Ignorance of what the other parties may be doing in the business is not an excuse. If you are financially involved in a business and have given guarantees, you need to be fully aware of what is happening with the day-to-day-operation of the business. There needs to be transparency.

After the event, there’s no point in saying ‘I trusted my partner’ or ‘I thought he/she was doing the right thing’. Put a partnership agreement in place. Specify obligations, duties, responsibilities, profit sharing rates, how partners will be remunerated and who will ultimately be in charge. The agreement should cover the following areas; death, disagreements and conflicts, (and how these conflicts should be managed), divorce, disability, and succession.

Have regular open and forthright meetings on how the business is progressing. Maintain an up-to-date statement of position for the business. In today’s convenient environment of cloud accounting, there is no reason why everyone can’t be fully aware of the current financial position. By the time you get your last year’s financial statements from your accountant, ten months after the end of the financial year, it may be too late!Partnership breakdown

Whether it is the father and son on the family farm or two friends in an engineering business, there is often implied understanding of what’s going to happen, but very little formal communication of how the business might transition and evolve over time.

The courts are littered with examples of people taking legal action against their parents, siblings, children or friends to claim their rightful dues.

Knowledge and understanding of what each party brings to the business relationship is paramount. Are your values the same, do you have the same work ethic? Ensure everyone is accountable. Do they have integrity? Do you trust them?

Ensure ownership of the business and its assets are held in the most appropriate structure to protect them from external creditors.  Protect your private assets from exposure to the business where possible. Be aware you are liable for all partnership agreements, known and unknown.

It’s not possible to eliminate all issues associated with a partnership but with open eyes and careful planning, the rewards can be very fruitful.

If you need further assistance to regarding any of the content discussed in this article, get in contact with your local RSM representative.