Sep 13, 2019

Everything You Need to Know About Buying Out a Partner

All good things must come to an end. This classic saying applies to everything from steak dinners to perfect sunsets, and it certainly has relevance to business partnerships.

There are positive scenarios for business breakups, such as a partner retiring or moving on to other opportunities in their life. On the flip side, there are also more volatile situations where personality differences, deception, or other factors that lead to the dissolution of partnerships. Unfortunately, in times like these, it can get ugly.

It’s important to remember that it’s a process that has been happening since the first smelting businesses formed thousands of years ago during the Bronze Age. So if you’re in the midst of a partnership breakup and it feels overwhelmingly difficult, know that there’s a path forward and you’ll be fine.

“Selling to a partner is often one of the easier transfers to handle legally—not that partners don’t have their battles and disagreements—but most buying partners want to make the transition smooth and get the selling partner out quickly and painlessly,” says attorney Mark J. Kohler. “Many times, I feel that partners are amenable and anxious to define the transaction and process so that they themselves can utilize the same method with a good conscience in the future.”

While it’s true that buyouts can be smoother than business-related transfers, it’s always advisable to do your due diligence and proceed with caution. This process starts with consulting an attorney that handles acquisitions. The attorney can help you understand the nuances of your state’s business partnership laws and form a proper strategy.

The goal at this stage is to outline the process and identify potential risks. Because make no mistake—a buyout always contains risks. And having a third-party expert involved is a proven way to mitigate them.

Here are 5 more steps to buying out a business partner:

1. Get an independent valuation

Before you can buy or sell anything, you need to know its value. You and your partners will likely each have some personal thoughts on the matter of valuation, so using a trusted firm to handle the valuation is always recommended.

To ascertain the value of your business, these third-party experts will estimate your future profits and correlate that with the projected rate of return.

2. Get on the same page

Once the firm has finished their evaluation process, you’ll have a solid foundation as you work to negotiate a buyout price that’s fair for all parties. These can be delicate conversations, so it’s helpful to have independent data available.

At the same time, remember that business valuations aren’t an exact science. There are myriad factors that are difficult to account for, yet play a role in the situation. For example, if your partner has decades of experience and plays a critical role in the business, they might ask for a higher buyout amount due to their prominent position. But you would also need to consider the decrease in valuation that could occur with the loss of their expertise, guidance, and connections.

Strive for fairness at this stage in the game because business valuation discussions can easily escalate into angry stalemates. To keep things progressing, as well as enhancing their company’s equity value, many buyers will acquiesce somewhat to the selling partner and accept a higher amount than they’d prefer.

3. Keep your options open

Both business valuations and former business partners can be unpredictable. It’s important to stay flexible throughout the process so you don’t find yourself holding the wrong basket, fully loaded with eggs.

Your attorney can help you navigate the process as it unfolds. Perhaps you’ll dissolve the partnership, rewrite the partnership agreement, or continue with the buyout. The important thing is that you react to each development strategically.

4. Organize your financing

Most buyers simply aren’t in a position to pay their partners in cash. For this reason, it’s important to check out the various debt financing options and see what works for your needs. Loans from the Small Business Administration are often thought of as some of the best for this kind of transaction.

You’ll also need to determine the structure of your financing. With a buyout over time, you’ll pay set amounts of money to your former partner over time until the purchase is complete. With an earnout, the selling partner would also be paid over time, with the added condition that they stay with the company for a transition period to help improve sustainability. And lump-sum payments are just what they sound like, with a single transaction occurring and the selling partner immediately stepping away from the business.

5. Handle the details

After you’ve settled on the best way to progress, be sure to do so carefully. Lean on your attorney whenever you have questions or encounter challenges. Your attorney will take care of drafting the agreement to release your partner’s liability. Additionally, the attorney will prepare the other necessary paperwork so you can file all the correct documentation at the local, state, and federal levels.

You’ll also need to transfer various accounts that are in your partner’s name. Each time you do this, take the time to reset the passwords on the online portal. This step isn’t done to show disrespect for your former partner but to start again with a clean slate.

As you follow these steps, you’ll help ensure your buyout is as respectful as it is uneventful. Even the most friendly of partners can get their feelings hurt in this process, so the more you can do to keep it professional and streamlined will pay dividends in the end.

If things do become hostile, try not to take it personally. Your former partner is likely going through a major upheaval in their life. This is truly a time where patience is a virtue. Rely on your attorney and other third-party experts to help insulate you whenever possible, and thoughtfully make your way through this process so you can emerge triumphant on the other side without any collateral damage.

It takes a little cash to change the world.

So what are you waiting for?

About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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