When a founder, shareholder, director, partner or senior employee leave a business, there is a direct impact on a company’s lifecycle, so a well-planned exit strategy protects value, reduces dispute risk, and ensures continuity for the whole business. The right legal approach depends on the business structure, the departing person’s role, and the destination of their interest. The focus of this article is on major, recurring problems that ought to be tackled sooner rather than later.
The first thing to do is to review the governing documents for company relationships. Exit strategies are typically outlined in a company’s articles of association, shareholders’ agreements, or service agreements. Similarly, partnerships will have notice provisions, decision making and profit allocations drawn out in partnership or LLP agreements. These documents indicate the proper channels a person should take when leaving a business and often contain restrictions on transfers and determine whether consent is needed to leave or sell an interest.
If the exit involves an ownership stake, the method of transfer and valuation are central. A departing shareholder may sell shares to existing owners, a third party, or the company itself through a buyback option. The parties should agree how value is calculated and how payment will be made. Where a purchase price is paid in instalments over time, protections such as security, guarantees or retention provisions may be appropriate to implement.
Within some arrangements, leaver clauses are present, distinguishing between “good leavers”, like retirement or ill health and “bad leavers” such as dismissal for misconduct. The difference can affect the price payable and the timing of transfer, so the wording should be checked carefully to avoid unexpected outcomes.
Restrictive covenants are another key consideration. Departing individuals may be bound by obligations after leaving such as not to disclose confidential information about the business, not to approach or take people or business connections, and not to compete in a similar business for a specified period. The obligations should be reasonable in scope and duration to ensure enforceability and ought to reflect the interests being protected such as client relationships or trade secrets.
For Directors, resignation should be properly documented and updated accordingly on Companies House records. It is important to address ongoing liabilities, including personal guarantees, indemnities, and potential claims relating to director duties. Considering situations where business relationships are sensitive, a negotiated exit agreement is beneficial as it offers confidentiality, mutual releases, and structured handover to minimise disruption and reduce the likelihood of litigation.
The best approach is to have an exit strategy that manages transition that protects both the individual departing and the business. At Nath Solicitors, we deliver expert advice on contracts and agreements. If you need assistance, please call us on 0203 983 8278 or email us at enquiries@nathsolicitors.co.uk.