Buying out your business partner can give you more autonomy over the company, but the process can be complicated. To minimize potential issues, it’s critical to approach a buyout with care and strategy. If you’re considering changing or dissolving your business partnership by buying out another partner, try following these six steps for a smooth transition.
1. Figure out what you want from a buyout
Before you get started, it’s helpful to consider why you’re interested in a buyout. Do you want to change the direction of the company, for example, exit a bad partnership, or gain more financial control?
Understanding your own motivations and goals is the first step to determining your deal-breakers and assessing where you’d be willing to compromise. From there, you can approach your business partner with more confidence and clarity.
2. Communicate your expectations
If you and your business partner can reach a mutual understanding before lawyers get involved, the buyout will be much easier. Start off on the right foot by communicating with your partner early. Ask to have a conversation, then speak calmly and directly as you explain your position, goals, and expectations.
Be prepared to answer questions in a professional, respectful way—including why you want to buy your partner out—and get input from your business partner, too. It’s also a good idea to document the conversation by taking notes. Having a record (however informal) of your points of discussion, areas of agreement, and potential concerns can serve as a starting point for negotiations.
3. Consult a business attorney and accountant
Partnership buyouts can become tricky—not to mention contentious—so it’s crucial to bring in professionals like an attorney and accountant.
A mergers and acquisitions lawyer will guide you through the entire buyout process, advising you on potential legal hurdles, helping you gather records, and working with you to create a fair buy and sell agreement.
A business accountant, on the other hand, will help you understand the buyout from a financial perspective. An accountant will go over your personal financials; the business’s profits and losses, assets and liabilities, and cash flow; your equity stake; and the company’s sales forecasts post-buyout.
4. Get an independent valuation of the business
Hiring an independent valuation expert to assess your company is a good way to get objective information about your business’s financial health.
A valuation company will typically review your balance sheets, cash flow forecasts, and sales or revenue to assess your business’s worth and determine its fair market value. Many valuation experts also consider a range of other factors that affect a company’s monetary value, including but not limited to: the state of the market; your business partner’s expertise, individual sale numbers, or creative contributions; and your business’s competition.
Once you get a thorough valuation, you can work on creating terms that benefit both you and your business partner.
5. Clarify the terms of your buy and sell agreement
A comprehensive buy and sell agreement is the basis of a successful partnership buyout. In addition to detailing the terms of ownership from a financial standpoint, it’s also important to outline the non-financial consequences of a partnership buyout.
Defining each partner’s role, responsibilities, and involvement with the business post-buyout can help prevent lawsuits and complications down the road.
If, for example, your partner is the lead salesperson at your company, are they going to continue working or leave? If they leave, how will you ensure they don’t take their contacts with them? Your lawyer may need to draft a non-compete agreement for your partner to sign. Similarly, if your partner came up with the business logo and slogan, you may want to include a clause in the contract that addresses trademarks or intellectual property rights.
6. Research financing options
Depending on your personal savings and your company finances, you may not have enough money to buy your partner’s share of the business outright. If that’s the case, here are some of your best options for funding a partnership buyout:
Get a bank loan. Banks typically offer affordable interest rates; however, bank loans can be harder to qualify for in a partnership buyout because you’re not using the money for working capital or growth projects.
Pay back your partner in installments with interest. Paying back your partner over time is a good option if you can’t qualify for a loan, but it also means you have to maintain a professional relationship with your partner for years post-buyout.
Sell your partner’s shares or interests to an outside investor. Equity financing is a great way to gain access to sizable capital. Keep in mind, though: you’d still end up sharing control over the company, since you’d essentially be exchanging one partner for another.
Buying out your business partner is a big move, but you can set yourself up for success by weighing your options and consulting professionals along the way. For more resources, check out our guide to funding, or apply for a business line of credit now.
This article is for informational purposes only. You should consult your own financial, legal, or accounting advisors before engaging in any transaction.