Most business partnerships start with optimism and big dreams. I can’t count how many times I’ve heard two partners insist they don’t need a formal agreement—after all, the business will be wildly successful. There will be more than enough to share. In those early days, it’s easy to believe nothing could go wrong. But what happens when reality doesn’t match the vision, and the partnership begins to unravel?
As an outsourced CFO, I’ve seen this play out first-hand. In just the past 45 days, two of my long-time clients—each with me for five or more years—have faced the end of a partnership. The similarities ended there. One dissolution was cordial, with both parties aligned on how to part ways. The other? Contentious, drawn-out, and filled with disagreements over who gets what.
These stories are far from unique. There are over 4.5 million business filing partnership returns in the United States. This number doesn’t include the millions more filing S-Corp returns that could also be counted as partnerships. Represented in these partnership are over 30.6 million partners. This brings me to my first point – a partnership is often more than two people. In fact, just running the math, the average partnership is comprised of almost 7 different parties.
The majority of partnerships span between 3-5 years. In fact, only 27% of partnerships last more than five years.
That’s why it’s critical to think ahead. What happens if a partner wants out—or if the partnership itself no longer works? In this article, we’ll explore key considerations when forming a partnership and share real-world lessons from both smooth and messy dissolutions.
The Critical Role of the Partnership Agreement
Think of a partnership agreement as the constitution of the business. It outlines topics such as ownership percentages, how profits and losses will be shared, the responsibilities of each partner, decision-making authority, and what happens if a partner wants to leave or new partners are brought in. Just like a constitution, it doesn’t guarantee harmony—but it does provide a framework to navigate disagreements and guide the business through both expected and unexpected events.
A partnership can dissolve for several reasons. Sometimes it’s voluntary—one partner wants to retire, pursue another opportunity, or simply cash out. Other times, it’s due to disagreements over strategy, workload, or finances that can’t be resolved. In some cases, outside forces like declining market conditions, lawsuits, or even the death of a partner force the decision. No matter the trigger, dissolution is rarely simple and always has financial and operational consequences that business owners must plan for.
Its essential for a partnership agreement to cover many of these circumstances that can happen. In both cases of my outsourced CFO clients I earlier mentioned, a partner is leaving to pursue other opportunities. Let’s outline some different reasons partnerships dissolve and how to address them in the partnership agreement. All of these reasons are partner initiated – in other words, I am not going to walk through the natural end of a partnership (for instance, if the property in the partnership sells).
Death of a Partner
The passing of a partner can create both emotional and financial turmoil. Without a clear plan, surviving partners may find themselves suddenly in business with the deceased partner’s heirs, who may not have the interest or ability to help run the business. Even worse, they may not have the same vision of how to run the surviving business, which can cause turmoil itself.
A well-drafted agreement should specify a buy-sell provision, often funded by life insurance. Each partner takes out a policy on the others, and when a death occurs, the insurance payout provides the cash needed for the surviving partners to buy out the deceased partner’s interest—ensuring financial stability and clarity for everyone involved.
Retirement
Eventually, many partners want to step back and retire. The agreement should outline how an equity interest is valued, how the buyout will be financed, and the timeline for payment. This prevents disputes over “what the business is worth” and provides a fair exit path while keeping the business financially healthy.
Any retirement or “forced repurchase” of a business should come with payments over time. It is often either impossible or extremely burdensome for a business to survive if the cash flow needed to buy out a partner is too much for the business to handle. As such, the partnership agreement should allow for the repurchase of equity to happen over time.
Leaving for Other Opportunities
It’s common for a partner to want to cash out and pursue a new venture. The agreement should address this possibility directly by setting rules for voluntary withdrawal. This includes valuation methods, notice periods, and restrictions to protect the business (such as non-compete clauses). When handled properly, one partner can move on while the remaining partners keep the business on stable ground.
We will talk about valuation in these instances in a moment. But remember that any voluntary buyout should be done over a term, not at once.
Partners Can’t Get Along—Business Continues
Personality conflicts and disagreements are inevitable in some partnerships. When partners can’t see eye-to-eye but still want the business to survive, the agreement should provide for mediation or arbitration, buyout provisions, or even mechanisms like a “shotgun clause” (where one partner offers to buy out the other, who must either accept or reverse the offer). These tools prevent gridlock and give the business a path forward.
In a “shotgun clause”, if the partners cannot agree on how to continue, either partner may trigger a buy-sell process by offering to purchase the other partner’s interest at a stated price. The receiving partner must then choose either to accept the offer and sell their interest at that price, or instead buy out the initiating partner’s interest at the same price and terms.
Partners Can’t Get Along—Business Ends
In the worst-case scenario, the disagreements are so severe that the only option is to close the business. Here, the agreement should outline a clear dissolution process: how assets will be liquidated, how debts will be settled, and how any remaining funds will be distributed. Having this mapped out in advance minimizes the emotional strain and financial uncertainty of shutting down.
Valuation and Financial Impact When a Partner Voluntarily Leaves
When a partner decides to leave, one of the biggest challenges is determining what their ownership stake is worth—and how the business will finance that buyout without putting itself in financial jeopardy. Too often, businesses get caught off guard, forced to come up with a large cash payout at precisely the wrong time, draining reserves and creating operational strain. The ironic thing about this process is the business is often worth less when the buyout is completed then when it started, merely because of the buyout itself.
Here are three considerations for valuations and voluntary buyouts.
1. Establishing a Clear Valuation Method
Your partnership agreement should define in advance how the business will be valued. Options include:
- Fixed formula – e.g., a multiple of EBITDA or a percentage of annual revenue.
- Independent appraisal – engaging a third-party valuation expert to establish a fair market value.
- Book value approach – using the company’s balance sheet, though this often undervalues growing businesses.
Including a fixed valuation formula in a partnership agreement can feel like a smart way to avoid disputes, but it carries real risks. Businesses change—sometimes rapidly—and a formula that seemed fair at the beginning may become outdated, either overvaluing or undervaluing the company. For example, tying value to book equity might drastically understate a high-growth business, while a revenue multiple could inflate the price if sales spike temporarily.
Locking in a formula also removes flexibility to account for market shifts, industry trends, or unique circumstances at the time of exit. The result is often frustration: one partner feels shortchanged while the other feels the payout is crippling. A better approach is to set a process—such as requiring an independent appraisal or averaging multiple valuation methods—so the agreement adapts as the business evolves. For this reason, I typically steer my clients away from putting a valuation formula in their agreement.
By agreeing upfront, partners avoid heated debates when emotions are already high.
2. Payment Terms That Protect the Business
Even more important than valuation is how the buyout is paid. A lump-sum payout can cripple cash flow. Instead, agreements should allow:
- Installment payments over several years, turning the buyout into a manageable expense.
- Use of external financing (such as a bank loan or SBA financing) so the business can spread the cost.
- Offsets against future profits, where the departing partner receives their buyout from distributions rather than draining operating cash.
These structures ensure the business remains stable while still providing a fair exit to the departing partner.
3. Guardrails Against Opportunistic Exits
Without proper safeguards, a partner could time their departure when the business is at a peak, locking in a high valuation while leaving remaining partners to manage future risks. Agreements can mitigate this by:
- Using multi-year averages for valuation metrics rather than a single year.
- Placing caps or floors on valuations to avoid extremes.
- Requiring a notice period so partners can prepare financially and operationally.
A Heated Dissolution – A Real Life Scenario
Catapult Strategies was originally formed by Bob Campbell in 2018. Two years later, Bob brought in a partner, Doug, and the two created a formal partnership agreement. While the company enjoyed moderate success, it never reached the level of growth Doug had envisioned. As a result, in 2025 Doug decided to accept a new job with another employer. This decision triggered the dissolution of the partnership.
Bob and Doug went through an informal process of valuing the business. They asked their CPA to prepare a rough valuation. The CPA provided a range, based on two different valuation methodologies, of what the business might be worth. Bob, the remaining partner, felt that taking the middle of the range was fair and reasonable. Doug, however, believed the valuation significantly undervalued the company. On top of that, Doug wanted to continue receiving a share of future earnings, claiming that he had created lasting value during his time as a partner.
No matter whose side you choose, it’s clear there are issues preventing the two parties from moving forward. What could have been done at the beginning of the partnership to avoid this situation? And how should these partners proceed now? Let’s dive into both questions.
What Could Have Been Done at the Beginning?
This conflict highlights why partnership agreements must clearly define both valuation methods and payout structures before disputes arise. At the start, Bob and Doug could have:
- Agreed on a Valuation Process: Instead of leaving valuation open-ended, the agreement could have required a formal third-party appraisal or specified a methodology (e.g., averaging multiple approaches such as EBITDA multiples, revenue multiples, and book value). This would have removed the subjectivity from Doug and Bob’s current debate.
- Defined Treatment of Future Earnings: The agreement should have clarified that departing partners are compensated only for the value of their ownership at the time of exit—not future profits. Without this language, departing partners may feel entitled to “what could have been,” creating conflict.
- Outlined Payment Terms: A structured payout plan (e.g., installments over 3–5 years) could have been included, ensuring that Bob could afford to buy out Doug without crippling the business.
In short, by setting expectations up front, Bob and Doug could have avoided this disagreement entirely.
How Should the Partners Move Forward?
Even though they didn’t plan for this situation properly, there are still practical steps Bob and Doug can take to move forward:
- Bring in a Neutral Third Party: Hiring a professional business valuator or mediator can establish credibility and fairness in determining the company’s worth. This removes the perception of bias that often arises when relying on internal advisors.
In full disclosure, this is how the parties decided to move forward. In their agreement, they designated one trusted individual as the arbitrator should situations like this arise. As such, both parties presented their cases to the arbitrator and that is how a decision was made.
- Focus on Finality, Not Future Earnings: Doug’s desire to benefit from future income may feel justified, but it complicates the dissolution. A clean break—where Doug receives a fair payout for his share today—will help the business move forward without ongoing obligations.
- Negotiate Terms That Balance Fairness and Stability: If Bob cannot afford a lump sum payout, a structured payment plan should be discussed. This would allow Doug to be compensated over time while keeping Catapult Strategies financially stable.
Ultimately, the best way forward is through a combination of objective valuation, structured payouts, and the recognition that partnerships are as much about planning for the end as they are about building for success.
Conclusion: Plan for the End at the Beginning
No one goes into a partnership expecting it to fail. Most start with trust, shared vision, and optimism. But as the numbers show, most partnerships last only three to five years—and when they do end, the fallout can either be smooth and manageable or costly and destructive.
The difference comes down to planning. A well-crafted partnership agreement that addresses valuation methods, buyout terms, retirement, death, and disputes doesn’t just protect the business—it protects the people behind it. The emotional strain of a partnership breakup is hard enough. Adding financial chaos only compounds the damage.
From my perspective as an outsourced CFO, I’ve seen both sides – the orderly dissolution where everyone leaves with respect intact, and the contentious exit that drains time, money, and energy from everyone involved. The lesson is clear – partnerships need an exit strategy from the very beginning.
So whether you’re starting a new venture or already in business with partners, take time now to ask the tough questions and put the answers in writing. A partnership is more than a handshake—it’s a business relationship with real financial consequences. Planning ahead ensures that when the time comes to move on, you’ll be ready.
