Even the best business partnerships end eventually. In a perfect world, all business partners could continue to work together amicably until retirement, forgoing the rigors of partnership dissolution. But in business, as in life, circumstances can change quickly.
A partner buyout may become necessary when partners decide to end their business relationship. However, one partner still wants to retain control of the company. This process can be tricky without the right strategy in place. Knowing how to buy out your business partner properly can save time and money and help maintain business profitability following a partner’s exit.
Figure Out What You Want From A Buyout
Before any legal or financial considerations are taken into account, it’s important to think about the buyout through in comprehensive terms. Why is a buyout necessary? What exactly do you intend to achieve from buying out a business partner? Maybe you feel the company needs a change in direction that can’t be reached with a current partner. Maybe your working relationship has badly soured, and it would be best for all parties to exit the partnership.
Whatever the reason, knowing what you want from a buyout now can help set the parameters for buyout negotiations later and deliver the best outcomes for all parties involved. Having an established partnership agreement can provide guidance in starting the buyout process.
Make Your Expectations Clear
Nobody likes getting blindsided. It’s imperative that you and your partner have an open discussion about buyout expectations as early in the process as possible. Hopefully, you began the business with well-defined partnership agreements, and you’ve been able to maintain a respectful, mutually beneficial working relationship throughout your years together. But even if the partnership is in a precarious place, clearly communicating expectations can still benefit the buyout.
Be receptive to feedback and expect to answer queries, especially the all-important question of why exactly you want to buy out your business partner. Try to document the findings from your conversation, where you agree and where you don’t, so that all partners can enter buyout negotiations on equal footing.
Agreeing on the Valuation of the Business
Business valuation is essential for the buy-sell agreement. The goal is to find a satisfactory price for all partners involved, ideally a middle ground to financially benefit both the remaining partners and the exiting partner. Perhaps unsurprisingly, business valuations can be contentious and are often the primary cause of conflict in partnership buyouts. For example, suppose one business partner’s expertise is especially valuable to business operations. In that case, they may demand a higher price than the buyer does not agree to.
With the help of an independent valuation expert, fair market value can be determined by quantifying your business’s worth, including the tangible and intangible assets held by the company. Expected profits, sales, and revenue, equipment, market share, creative and operational contributions of a business partner are all considered.
Agreeing upon the company’s valuation is essential before any deal can be reached. Because of the likelihood of disputes and contentions, it’s typically a good idea to involve a law firm, accounting firm, and other business advising professionals at this stage.
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Formalizing the Structure of the Payment
A mergers and acquisitions lawyer can help to ensure that all legal requirements are met by partners, and the buyout agreement is structured in such a way that potential disputes are minimized.
Like a prenuptial agreement preceding a marriage, having a standing partnership agreement can help expedite the process when things end. If stipulations regarding buyouts and determination of buyout price are drafted ahead of time in a partnership agreement, deciding on a defined deal structure is easier.
A buyout payment can be structured in a few different ways. With sufficient cash on hand or through business loans, a lump sum buyout can be made to the bought-out partner. Structured long-term payments are also possible. These payouts can be structured as monthly or quarterly payments with payment terms extending for three or eight years.
However, long-term payments may depend on the state of the relationship between partners. If relations have become malignant, the departing partner may insist on a lump sum structure if for no other reason than to cut ties decisively.
Determining the Best Way to Finance the Partnership Buyout
Settling on the terms of the buyout agreement can be a herculean feat. But even after reaching an agreement and formalizing the structure of the payment, financing the buyout remains a challenging issue.
The preferred method of financing the partnership buyout is self-funding. As previously explained, this involves using available capital to pay the selling partner in a structure defined by the buyout agreement. Payments can be made in installments or in a lump sum.
Suppose cash flow problems are burdening the business. In that case, it’s possible to apply for loans from the Small Business Administration (SBA) to fund your partner buyout. This option does require substantial planning, however. The application process can take several months, and the buyer will need to demonstrate their ability to effectively continue operations on their own and meet other criteria.
You could also raise capital by selling your partner’s shares to private investors to fund your buyout with equity financing. However, this method shifts the partnership to private investors, essentially replacing one partner with another. Borrowing money with a bank loan to increase your share of ownership with debt-funded financing is another option, although the money may be difficult to qualify for.
Clarify the Terms of Your Buy and Sell Agreement
The financial aspects of the buy-sell agreement are understandably the main concern for most partners. But the terms of the buyout agreement should be forthcoming about the non-financial consequences as well. It’s important to be as clear as possible when it comes to each respective partner’s responsibilities and roles in the company following the buyout.
Buyout terms may need to include non-compete agreements and trademark rights clauses. Suppose the selling partner intends to continue working elsewhere. In that case, it’s important to protect your company’s intellectual property, business contacts, and proprietary processes to remain competitive.
Finalize the Buyout
After you’ve taken the appropriate steps to reach a buyout agreement with your former partner, the last step is ensuring that all necessary paperwork is completed, including any non-compete agreements or other legal addendums.
Buying out your business partner is a challenging process, but it doesn’t have to be painful. With expert services from Exit Consulting Group, you can buy out your partner in a professional manner while preserving the integrity of your business.
How does buying out a business partner work?
Buying out a business partner can be done in several ways. In the best case, it involves partners amicably deciding to end their partnership and using available capital to pay the exiting partner for their shares in the company. In more complicated situations, the process may involve equity financing, applying for loans, or paying the selling partner in installments as stipulated in a buyout agreement.
How do you value a partner buyout?
You can value a partner buyout by consulting a business valuation expert or by multiplying the percentage of ownership by the appraised value of the business.
What happens when a partnership buys out a partner?
When one partner decides to leave the business, another partner may decide to buy their share of the company. With the help of legal and financial advisors, a buyout agreement is drawn up, and a deal is made regarding how much to pay the exiting partner.