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.
So, what's an under-funded business partner to do in these circumstances?
Keep it Friendly and Win
When you're looking to fund your buyout, your soon to be ex-partner may be your best bet. Many business owners find that creating a payment plan with the partner you're buying out--similar to a loan repayment plan--is the most affordable way to achieve a buyout. In this set-up, your former partner would likely collect an additional percentage of equity--beyond the principal equity owned by them according to the partnership agreement--as interest on your private loan.
Of course, in order to achieve such a mutually agreeable solution, both partners must be willing and able to dissolve the partnership amicably. If you've developed a hostile relationship--as sometimes happens in business partnerships--your other half may not be so willing to make the buyout process easy for you, or could back you into a corner with an over the top interest rate.
Make it Official
Once the terms have been negotiated and all parties are on board with the new agreement, you're ready to make your buyout official. Make sure you file all necessary paperwork with federal, state, and local authorities; then transfer all business related accounts, making sure the former partner's name is removed from all accounts. Your acquisitions attorney can make sure these pieces are handled correctly, as well as draft paperwork to release the former partner from business liability.
In the best of circumstances, you'll be able to negotiate a buyout agreement that is a win on all sides. But if conflict arises or the relationship ends less than amicably, do your part to stay professional. These things happen, but it's up to you to keep things civil and move your business forward from the best possible position.
TMM Group Ca, LLC can assist you in the your Buyout Financing. Contact our office for more infomation.