You just formed a real estate partnership. As hard as it is to imagine an ending to your newly formed venture, an exit strategy belongs in every business plan. Adding an exit strategy to your real estate partnership ensures protection for both partners. It will also reinforce that the business venture is a professional relationship, not a personal one.
There are several possible reasons for needing an exit strategy for your real estate partnership.
Here are a few possibilities to consider when developing an exit strategy with your real estate business partner.
- Resignation. Your exit strategy should clearly define what happens if one partner decides to resign from the business. How will the partners be compensated if one walks away? What will happen if the business is sold or acquired by someone else?
- Disagreement. Fighting and disagreement are one of the most unpleasant ways to dissolve a partnership, yet surprisingly common. If the only solution is to split, then partners should know ahead of time how they will handle things.
- Financial Conflict. Differing ideas on how to spend, distribute, or invest money made in a partnership can be a tricky task. Involving an accountant in the development of your exit strategy for your real estate partnership can ensure that business finances run smoothly, even if the partnership dissolves.
- Merging or Selling. The exit strategy for your real estate partnership should address how to handle the business if it grows, either through merging or selling.
- Buy-out. A good exit strategy includes the possibility of one partner wanting to buy the other partner out. Planning ahead for a buy-out will create a smooth financial transaction.
- Death. Details should include what the financial compensation package should be for the surviving family members. You should also decide who will own the deceased partner’s portion of the business. Will the new stakeholder continue in the business? The new stakeholder and surviving partner can decide this later.
- Divorce. Your exit strategy should also include guidelines for what happens if one of the real estate partners gets divorced. If you don’t anticipate the possibility of divorce, then you may find yourself with an ex-spouse as a new partner.
- Disability. An exit strategy should include clear guidelines about what path the business will take if one partner becomes disabled. This part of the strategy can be the most difficult to develop because while a partner may be disabled—mentally, physically, or even financially—they still have a stake in the business. Disability points to discuss should include transfer of ownership, short and long-term disability payments, and finally, health insurance coverage for the disabled partner and his or her dependents.
Why you absolutely need an exit strategy for your real estate partnership.
A clearly defined exit strategy in a real estate partnership does more than just determine answers for the “what if” questions. It provides peace of mind for both partners. It ensures a fair outcome when the partnership comes to an end. Have your accountant help you draft and/or review your exit strategy for your real estate partnership.
Along with having a plan for exiting your partnership, you should also create a succession plan. Succession planning identifies and develops internal and external individuals to potentially fill key business leadership positions in the future. This makes sure that individuals are prepared for the future and gives peace of mind to all players that a plan is in place. Read more here about succession planning and how a good accountant and virtual bookkeeper can help with this important part of your real estate business.
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