Forming a partnership can be an exciting endeavor, but you need to protect your interests in case things do not work out as planned. That is why every partnership agreement should contain an exit clause.
There are a few key reasons why you need one.
Allows for an orderly dissolution
An exit clause establishes a process for how partners can leave the business. This ensures that if a partner wants out, there is a plan in place. The exit clause typically outlines notification procedures, buyout terms, transfer of interests and other logistics. Having these details mapped out ahead of time minimizes confusion and disputes if a partner departure occurs.
Control when and how a partner exits
The exit clause gives you and your partners the ability to control the circumstances around a partner’s departure. For example, you can specify conditions that would trigger mandatory withdrawal, such as a partner filing for bankruptcy. You can also outline limitations, such as restricting a partner’s transfer of interests without approval. This protects the business and gives partners peace of mind.
Provides flexibility for business evolution
Partnerships frequently change over time as businesses evolve. An exit clause allows you to account for that change, such as partners wanting to reduce involvement due to retirement or alternative ventures. The clause provides an avenue for partners to exit gracefully as needs shift.
Manage risk appropriately
By carefully constructing your exit clause, you can mitigate risks for remaining partners. For example, you can prevent an exiting partner from taking clients, intellectual property or other assets. You can also prohibit competition in your immediate area. This allows you to mitigate the risks associated with the partner leaving the business.
Statistics show that up to 70% of business partnerships fail. Having an exit clause provides the framework for partnership structure changes should the need arise.