How to Buy Out a Business Partner
Steps for the Dissolution of an Informal Partnership Agreement
Oct 19, 2009
While there are many factors that could lead to a partner buyout, there is one general rule that is common to every situation: The more planning, care, and consideration that all those involved put in to the process, the greater the chances that the buy out will go smoothly. This will hold true even in delicate situations where partners disagree and do not want to compromise.
Business partners who chose from the beginning to make formal written agreements that clearly spelled out how and under what circumstances a buyout can occur, should consider themselves lucky. A considerable amount of work may have already been done.
But what happens when the business partners did not make any formal written agreements? Though sample partnership contracts can be easily downloaded from the Internet (often for free), it is nevertheless quite common among small business owners to overlook this vital step. Conducting a partner buyout in this case can then be a sticky, emotional, and financial mess.
The following is a brief guide to buying out a business partner where no prior agreements were made:
Determine the Net Worth of the Business
The actual value of the business will be a major factor in determining how and what to offer the partner who is being bought out. It will also help the remaining business owners to determine how much money will need to be raised to finance the buy out transaction.
To find out the approximate value of a business, owners should make sure to calculate the worth of all the "hard" assets, such as equipment or real estate, any "soft" assets such as trademarks or software, as well as any outstanding accounts receivables and profits. Business owners should also not forget to factor in any outstanding debts or other financial obligations.
To get an accurate appraisal, it is a good idea to hire a professional appraiser. The appraiser will not only consider the above factors, but also variables, such as business history, competition, management style, and even the state of the economy.
Clarify the Details of the Buyout
Before buying out a business partner, the remaining owner(s) should become familiar with the various ways to conduct the buy out transaction and should also consider any areas that will be affected by the change in ownership. Ideally, business owners need to develop a clear outline of what they are looking for in the buy out and what can be realistically offered to the departing party. It is a good idea to consult an attorney who can help hash out the details.
Here are a few specific points to consider:
- What kind of partner buyout is most suitable given the circumstances? Will the departing partner cash in completely or still retain an interest in the business?
- How much money will be needed to finance the buyout?
- What kind of business structure will be appropriate once the buyout has been concluded?
- How will the buyout effect the business in general, including the time and responsibilities of the remaining partner(s), the employees, the assets, and the customers?
Get a Professional to Mediate Between the Partners
A business partnership is often compared to a divorce and with good reason. Typically, business partners have each personally invested considerable time, money, and energy into the business, and this can draw on the emotions. Instead of making a series of rational business decisions, the buyout can then turn into an emotional battle. The bottom line here is that all the partners involved need someone in the middle. One can opt for an attorney (it could be the same person who helped hash out the details of the partner buyout), or one may want to consider another professional who is experienced in general mediation, especially if funds are tight.
Make Sure that Financing the Buyout is Doable
All the planning in the world will not make a difference if the funds (or assets) needed to conduct the transaction are unavailable. Business owners should make sure that they have the financial means to finance the partner buyout. Business owners who have a hard time getting a business loan and who do not have any personal funds to draw on, can try to leverage the business' assets, such as outstanding receivable income.
Business owners should keep in mind that most business partner buyout contracts require that the remaining partners be responsible for renewing the business' loans so that the previous partner is removed from any repayment obligations. Depending on the business's new structure and financial situation, this may also affect the amount of financing that will need to be raised.
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