There are several ways to end a business partnership. The right method will be different for different situations and different parties.
One popular method for terminating a partnership is a buy/sell clause. In this method one partner will put out a number and the other partner has the option to either buy out the other partner or sell his interest for that amount. This is an effective and equitable method for terminating a partnership. But the problem in this scenario is that often times neither partner can afford to buy the other partner out.
Of course sometimes Court intervention is necessary when there is a break up of an entity or partnership. But it may surprise you to learn that often times a court’s power is very limited. This particularly true, if the business is profitable and still making money despite the fact that the principles are not getting along. A Court will typically not terminate an entity, simply because the partners do not get along.
Another issue that must be addressed in partnership agreements that has to do with the termination of partnerships or other business entities is the withdrawing partner’s ability to start a competing business or work for a competitor. It is important that the businesses have a non-compete agreement for their partners as well as a non-disclosure agreement protecting their confidential and proprietary information. Traditionally non competes were disfavored by public policy. The idea behind them being disfavored is that they hinder competition in the market place. Also Courts want to recognize that the withdrawing partner (for lack of a better term) has the right to make a living. But businesses have the right to expect that partners and high level employees won’t take certain confidential information to a rival business. Courts understand the competing interest at play and recently have showed more of a willingness to give more teeth to non-compete provisions so long as the follow certain parameters.
First of all, for a non-compete to be valid the person must have had access to some type of proprietary or confidential information on which is important to the viability of the business. This can be lots of different things. Obviously it could be something as complicated as a patent or other trade secret but also could be something as simple as a customer or potential contact list. For instance, if Walgreens attempted to enforce a noncompete agreement with a former cashier that recently took a job at CVS, a court would not hold that non-compete agreement enforceable because more than likely that cashier did not have access to any high level information at Walgreens.
Obviously when we are speaking of partners, we are more than likely talking about somebody who has access to confidential information of the business. But it is possible that a scenario could arise where there was a silent partner that was not involved in the operations. If that is the case then it is very well possible that a non-compete would have no effect on him. Regardless it is important that partnership agreements spell out and acknowledge that each partner is privy to certain “proprietary and confidential” information.
Second the clause must be reasonable as to the time and the geographic area. Generally five years for a non-compete is going to be about as long as a court will allow and that may be pushing it. You might be able to find an exception to this here and there but typically that is going to be the long end. I always recommend that the length of time be two to five years. Again at some point in time, the partnership needs to understand that former partner gets to move on with his life and start working again.
Third the clause must be reasonable as the geographic area. A business that primarily serves Dallas/Fort Worth metroplex can reasonably expect to have a non-compete agreement that prevents a partner from competing against them for their business in the metroplex, but a clause that would prevent them from engaging in a similar type of business throughout the entire state of Texas would more than likely get shot down. Generally what I recommend for this is to phrase the clause in terms of preventing the former partner from competing against the business in the same areas that he worked for on behalf of the partnership.
If you have specific questions regarding terminating a business relationship request a free evaluation by calling (817) 877-3303.