United States
Updated: November 20th, 2023
Thinking about buying out your business partner? Before you make any decisions, it’s crucial to have a clear understanding of the process and potential pitfalls. Buying out a business partner can be a complex and delicate situation that requires careful consideration and planning. Before you proceed with a buyout, there are several important factors to consider. From legal and financial implications to the impact on your business relationships, it’s essential to be well-informed and prepared. In this article, we will explore the key things you need to know before buying out a business partner, helping you navigate this significant decision with confidence and clarity.
There are several reasons why a partnership buyout may occur. One reason is a disagreement or conflict between the partners regarding the direction or management of the business. This can lead to a breakdown in communication and trust, making it difficult for the partners to continue working together. Another reason for a partnership buyout could be a change in circumstances or goals of one or more partners. For example, a partner may want to retire or pursue a different career path, resulting in the need for a buyout. Additionally, a partnership buyout may be necessary if one partner is not contributing their fair share to the business or if there is a financial crisis that requires a restructuring of ownership.
Overall, a partnership buyout often occurs when there is a significant change in the dynamics or objectives of the business partnership. Whatever the reason, if you and your business partner choose to terminate your working relationship, and you still want to retain control of the business, you’ll need to consider a partnership buyout.
Buying out a business partner is a significant financial and legal decision that can have long-term consequences for your business. It’s crucial to have a thorough understanding of the process, as well as the potential pitfalls and considerations involved. If you’re wondering how to buy out a business partner, here are seven things to keep in mind if you choose to terminate a partnership agreement:
The key to a successful partner buyout is to “remain on friendly, congenial ground,” says Jim Angleton, president of AEGIS FinServ Corp, a financial consulting company. As an expert in partner buyouts and someone who’s bought out a business partner, he says it’s important not to let drama or emotion enter the picture.
It’s normal to feel resentful or angry when splitting up, but airing these feelings isn’t productive. Approach your partner calmly and rationally, and focus on finding a win-win solution, Angleton suggests . “What is good for you should be mutually good for your partner.”
The more details you can square away with your partner one-on-one, the better off you’ll be when you invite outside parties into the conversation.
Try to find common ground first, says Angleton. He suggests creating a joint Memo of Understanding to give to your representatives, wherein you both agree on a solution and write what you want going forward. “This will lower your professional invoices,” Angleton says, “and make your partner buyout work smoother.”
Sometimes, though, there may be too much tension or animosity between you and your partner to have a productive conversation on your own. If that’s the case, consider bringing in a mediator to help guide the discussion of a partner buyout.
Orchestrating a successful partner buyout requires the help of several different people. Contact your accountant, banker, and attorney before you make any major decisions, says Ken Stalcup, a CPA and senior director at Houlihan Valuation Advisors, a company that provides business valuation services.
“Your accountant can help you prepare tax returns and other financial statements necessary to determine the value of the seller’s equity interests,” says Stalcup. “The accountant can also discuss some of the tax considerations in buying and selling,” he explained, “and help structure the transaction to minimize the tax bite.”
Your banker can help you discuss options to finance the buyout agreement and manage your funds throughout the process. “The bank may also be involved in the funding of the purchase of the exiting party’s stock or equity interest.”
An acquisitions lawyer, on the other hand, will inform you of your state’s laws regarding partner buyouts, and advise you in creating the terms of a buy-and-sell agreement. This might include details around the price, the pay-out method, and potential non-compete clauses.
Consider hiring an independent financial expert to assess whether the business is in a good position for a buyout agreement. For example, when business owners contact Stalcup for help, he develops a financial profile of the business to calculate “the fair market value of the exiting owner’s interest.”
He does this by examining the balance sheet, expected profits, and future cash flow of the business. “Three things that drive value are growth, cash flows, and risks,” he explains .
Information from a third party can help you and your business partner view the buyout more objectively. From there, you can come up with buyout terms that feel fair and mutually beneficial.
Any time you make a big move in business, there will be risks — and you need to be prepared to handle them. Take some time to identify the greatest risk to your business if your partner sells.
“Suppose the exiting owner is the key saleswoman for the business. She has all the contacts and all the relationships. Can the business continue without your business partner’s expertise?”
It’s critical to anticipate and understand the consequences of a buyout before you go through with it. That way, you can brainstorm solutions ahead of time, like instating a non-compete agreement, to either prevent or reduce the probability of certain problems cropping up.
It’s important to keep accurate records of everything you discuss throughout the buyout process. The documents will serve as the basis for your buy-and-sell agreement and can help limit potential problems and lawsuits later.
Not only do you need to set clear terms of ownership in your partnership agreement, but you also need to define each partner’s role, responsibilities, and business influence going forward. Be thoughtful about the tone of the partnership agreement, too, Angleton says , as an aggressive or malicious tone can easily negate the goodwill both partners cultivated. “The verbiage of the buy/sell agreement is what makes lawsuits come alive.”
Depending on your financial situation and the state of your business, you may not be able to pay for a partner buyout with cash on hand. There are a few different ways to fund a partner buyout, however.
You can self-finance, which means you treat the departing partner like a lender and pay that person gradually over a certain amount of time. This strategy works well when you have a healthy relationship with your business partner and clearly defined legal terms surrounding the payment plan. If the partnership is toxic, though, dragging out your time together by paying a little bit at a time may not be the best decision.
Another option is to apply for a business loan. This allows you to buy your partner out at once, while still paying off the amount in smaller chunks.
Business partnerships can be beneficial, but they can also become strained over time. When the relationship between business partners deteriorates or one partner wants to move on, learning how to buy out a business partner may be the best solution. However, it’s essential to approach this process with caution and ensure that you are well-informed before proceeding. A successful partner buyout can pave the way for new growth in your business. Of course, negotiating the terms of the buyout can be tricky, but with the right attitude and approach it’s completely doable.
Paige Smith is a content marketing writer who specializes in writing about the intersection of business, finance, and tech. Paige regularly writes for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.
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