Partnership Dissolution & Partnership Agreements

I own a business with a partner. We created an LLC, and we each own 50%. I’d like to sell my half, but am concerned that my partner will go out and start a new business by herself and convince all our existing customers to join her new business before I can sell my half. If so, my part becomes pretty much worthless. Can she do this?

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Permalink Reply by Team Sta.rtUp.biz on June 18, 2008 at 9:06pm: As a practical matter, if your operating agreement doesn’t provide the roadmap for your situation (and since you’re asking the question, I’m guessing that it doesn’t), it would be best to discuss the issue with your partner directly and resolve your concerns. If you do not, you run the risk of getting into a legal dispute with costly attorney’s fees that may well end up in excess of the amount in dispute. Also, you run the risk of having your interest discounted either by a loss of customers, or due to a potential buyer’s concern that the LLC risks losing customers.

As a legal matter, the customer database is property of the business that remains with the business after you sell your 50%. If your partner tries to take the LLC’s clients away from the LLC and into a new business that she starts, she is stealing from the LLC – not from you. As such, her breach of her member’s fiduciary duty to the LLC would be cause for legal action against her on behalf of the LLC.

But don’t hang your hat on her duty of loyalty to the LLC. Address the problem head on to try to prevent what could be a costly and messy situation. And in the future, the best ways to keep this from happening again are:

1) Put a “Right of First Refusal” in your agreement. This would give your partner the right to buy your interest for the same price that a bona fide third party offers you for your interest. Because your partner has the chance to fairly acquire your interest and keep the whole business for herself, she has less of an incentive to destroy the business by stealing the LLC’s customers.

2) In the situation where a partner contemplates selling less than 100% of her ownership, “Tag Along Rights” and “Drag Along Rights” would also be useful.

3) Specify the method for a potential sale of interests in your operating agreement. A “Dutch Auction,” for example, is a popular type of auction where the auctioneer starts with a high price which is lowered until a buyer accepts the price. Another selling process is the “Chinese Auction,” where bidders submit secret bids with the amount they are willing to pay for the ownership interest, with the high price winning. Yet another option is the “Texas Shoot Out,” where each party writes down a price at which they would be willing to buy the other party’s ownership, or similarly, sell their own interest, with the higher bidder buying the other partner out at that price. There are yet other sales methods, which each having advantages and disadvantages, and opportunities for strategizing.

Choosing who you partner with is more important than how you “paper” the agreement. However, drafting a tight operating agreement that protects the partners’ money will help keep you out of messy situations.; ▶ Reply to This

Permalink Reply by MonkeyBusiness on June 19, 2008 at 9:27pm: Awesome reply and invaluable advice. So glad that I found this site and wish I would have asked you a long time ago!; ▶ Reply to This

Permalink Reply by erika hargis on September 7, 2008 at 9:08am: i have found parnterships to be very helpful and hurtful; ▶ Reply to This

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