Business partnerships have to end for a number of reasons. Sometimes there is a misalignment of goals, or one partner is at a different life stage, or one partner wants to sell and the other wants to keep the business operating as it is. In any case, when it’s time to buy out your business partner there are a number of legal intricacies that must be handled well if you are to achieve a successful business partnership buyout.
The following are some important tips that will make things go more smoothly:
Know how the buyout will affect the company and be sure you can afford it.
Get a lawyer to help you reach common ground and tie up all the strings.
Try not to fight over valuation.
In the best scenario, you were both thinking about this situation ahead of time and you have a partnership agreement in place – it’s known as a buy-sell agreement – and it dictates the terms of the buyout should either of you decide to leave the business.
Four Steps to Buy Out your Business Partner
The following are the most commonly recommended steps to follow when buying out a business partner:
Get a business valuation. You have to know the full value of the business – a complex task even for the smallest companies – before you can do anything else. Hire an outside consultant you can both agree on, or get separate valuations that you’ll have to reconcile later.
Hire an experienced mergers and acquisitions lawyer – even if things are friendly. Legal counsel through this stage is necessary due to the many state and federal laws that affect this type of agreement change. If the dealings go badly later, the attorney will help ensure a fair and legal breakup.
Review all the options. Some states allow a partner with 50% ownership to dissolve the company on their own, others do not. As a small business owner, you may need to negotiate an agreement that is a little out of the box depending on your financing capabilities, the business valuation, and more, so review all the options.
File all necessary paperwork and transfer all accounts to your new business name, entirely clearing the other partner’s legal ownership from all accounts. There are many important documents at this stage that release the departing partner from liability claims against the company so it’s important to have this handled very well.
Even if you do have a partnership agreement, each partner carries shared liability. Specifically, both of you are liable for the actions of the business, its debts, and its earnings and nearly any court in the world will hold you equally accountable until one of you assumes the responsibility.
Funding a business partnership buyout is very different if you’re a large public company versus a small privately held company. Let’s take a look at how to fund a partnership buyout.
Funding a Business Partnership Buyout
Funding a partnership buyout typically comes in two forms of capital: equity or debt. Debt is more often used than equity. With debt, you are removing an owner and increasing your ownership with borrowed money. With equity, you are simply exchanging one owner for another.
The problem is that it’s very difficult to get funding to buy out your partner. Why? Because that new debt is unlikely to financially benefit the company in any way – even if the partner you are getting rid of is toxic. Banks usually view this type of loan as unproductive and few will touch the deal.
One of the best ways to buy out a business partner is to self-fund the buyout. In other words, you pay the departing partner over time – as if they were a lender – and in this case, you don’t need anyone else’s approval for the transaction. You will both, however, need legal advice to work out a fair and suitable agreement.
Three Business Partnership Buyout Alternatives
In some cases you may not have the cash or financing to buy out your partner’s share. If you want to continue doing business, however, you may consider some alternatives:
Change the weighting in the partnership agreement. This means assuming a majority share of the decisions, finances, and liabilities while your partner has a lesser extent.
Legally dissolve the partnership entirely. If you have a partnership agreement, this may be able to give you a cleaner break but only if this was included in the agreement. Otherwise, you’ll definitely need legal advice.
If your partner won’t budge and your agreement has you trapped, you can sell your share of the business and walk instead. This won’t leave you with the business, but it could effectively resolve the dispute.
As we noted, having a partnership agreement makes getting through the partnership buyout process much easier, but there are always issues that crop up that neither of you likely foresaw. Without a partnership agreement, things can get ugly quickly and involve a great deal of risk.