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The Break Up (Or How to Buy Out Your Business Partner)

By Jared Hecht CEO and Co-founder, Fundera

Whatever the reason is, if you want to keep your business, but your partner has to go, here's everything you need to know to successfully buy out your business partner. Maybe you want different things out of the business. Maybe your partner has been offered a new opportunity too good to pass up. Maybe, as the saying goes, "it's not them, it's you." Or maybe there's been a personality conflict, and you can't get out of this partnership fast enough.

Business partnerships end for a wide number of reasons. Some are friendly, amicable, and in the best interest of both parties--while still others can reach a bitter, nasty end.

Set Detailed Terms From the Beginning

Hopefully, you and your business partner began your business venture by drafting up a document that outlines how you run the business, make decisions, divide responsibilities, and so on. Well-written partnership agreements also include a dissolution strategy.

Think of your dissolution strategy like a prenuptial agreement for your business partnership. It creates a clear exit strategy from the beginning, while everyone is on good terms. That way if things go south with the partnership, you're not stuck negotiating how to part ways in the midst of hard feelings.

Buying out your partner without an initial partnership agreement isn't impossible, but it can certainly make things messier. So especially if you and your business partner have been operating without a partnership agreement, speak with an acquisitions attorney immediately--before you move forward with buyout negotiations.

Get a Business Valuation

To determine a fair price for your partnership buyout, and to make sure that buying out your business partner is a good long term investment, you need to know exactly how much your business is worth. You'll do this by having an independent valuation firm perform a formal business valuation.

When valuing your business, valuation consultants typically value all expected profits in the foreseeable future, then discount the future profit projected for each year by the rate of return they expect.

However, there are several outside factors that could impact the valuation of your business. For example, how essential are your business partner's expertise or industry contacts to your business's success? Considerations like these could impact how valuable your business would be without him or her.

Make Sure a Buyout is Your Best Choice

Buying out your business partner can be costly, and doesn't always have the best available financial return. Before you jump to the decision to buy out your business partner, explore what other options may be available.

Provided you had a well-written partnership agreement in the first place, you may be able to simply dissolve the partnership. This would allow you to go your separate ways as partners without any one person needing to buy out the other person.

Or if you're set on continuing to do business, and your partner is ready to close up shop, consider changing the weighting in the partnership agreement. By assuming a majority share of the decisions, finances, and liabilities, you could hold primary control of your business without the expense of buying out all of your partner's equity.

Unfortunately, if your partner refuses to sell or take a minority stake and your partnership agreement doesn't have clearly outlined provisions for ending the partnership, you may have fewer options. Your best choice here may be to sell your stake in the business--either to your business partner or to a third party--and move on.

Hire an Experienced Acquisitions Attorney

Even if your relationship with your partner is amicable, and even if you are working from a clearly outlined partnership agreement, it is in everyone's best interest to hire an experienced acquisitions attorney to negotiate your buyout.

Working with an acquisitions attorney will help you ensure that your buyout conforms correctly to state and local laws, appropriately honors the initial partnership agreement, and that all parties understand and agree to the terms. The cost of hiring a professional is worth avoiding any headaches or conflict down the line over buyout terms that were mishandled or unclear.

Research Your Buyout Funding Options

Of course, in order to go through with buying out your business partner, you'll need to acquire the funds to do so. Unfortunately, many business partners find that without independent means, buyout funding can be hard to come by--especially from a small business lender.

When lenders consider approving your small business loan, they are looking for ways that the capital will boost profits for your business--profits you can use to make your loan payments. Because a buyout doesn't actually infuse any new money into the business or financially benefit the business in any way, it can be tough for owners to successfully make loan payments. So lenders tend to avoid servicing buyout loans.

Equity-based buyout funding can be similarly hard to obtain--because again, with an investment that doesn't offer direct financial benefit to the company, it's hard for investors to expect a strong return.