Buying out a business partner doesn’t have to be stressful or complicated. Read this guide to see how you can carry out the process with ease.
Change is inevitable when running a business, and that sometimes involves a partner retiring or leaving for other opportunities. Holding onto the company often requires buying out the partner who wants to leave. The decision to split up the company comes with potential benefits to the remaining partner, such as retaining the decision-making power and keeping the profits.
However, a partner buyout always comes with possible pitfalls, such as assuming all the risks and costs instead of sharing them and making pivotal decisions with no input or support. Ultimately, the remaining partner, having decided that the benefits outweigh the risks, should know how to buy out a business partner successfully.
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Stay on Positive Terms
In an ideal situation, both partners want to separate on good terms. Even if that’s not the case, it’s always essential to keep the tone positive and constructive, even if the process gets stressful at times or if the selling partner starts to take a confrontational stance.
Learning how to buyout a business partner won’t always go smoothly, and hostile feelings might creep in occasionally. It’s never a good idea to respond in kind. Instead, it’s essential to keep things as civil as possible so that both parties can resolve the separation quickly and move on.
Planning is the best way to curtail difficulties that might surface during a partner buyout. Preferably, a partnership agreement would already be in place, long before it’s time to consider a buyout. Planning for either partner’s exit as early as possible will help to quell disagreements and other issues in the long run. Even when conflicts or bad feelings emerge, a plan provides an emotion-free and objective guide for navigating them.
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Work with an Attorney
Even when a partnership is on the best of terms, an acquisitions attorney can work through the technical components of the partner buyout, enabling the buyer and seller to maintain a positive relationship throughout the process. Both parties should think twice about forgoing legal guidance because partnership laws vary by state. Furthermore, when colleagues initially set up the partnership agreement, an attorney can help them plan for potential legal and financial snags down the road.
Hiring an attorney is worth the cost in most situations. An acquisitions lawyer will ensure that all steps in the buyout process adhere to all local and state partnership laws and follow the partners’ original agreement. The attorney fees will likely seem minuscule compared to the potential headaches associated with misunderstandings or navigating technical issues.
It’s also wise to hire an accountant who can help determine the worth of the business and prepare the necessary tax returns and other financial reports. An accountant can also look for ways to minimize the taxes owed and bring up other implications for buying and selling parts of the business. Another important professional to enlist is a banker, who can present traditional and alternative options for financing the partner buyout.
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Get an Independent Valuation
As Joe Alter, owner and broker of Sunbelt Business Brokers in Florida, pointed out to Business Observer, “The times when it can become volatile is when the partners have different ideas of what (a business) is worth.” This is why an objective assessment is essential.
An independent valuation gives partners a more accurate picture of cash flows, risks, liabilities, and growth, all of the things that factor into the overall value of the enterprise. An independent valuation will eliminate guesswork and typically smooth out negotiations. It will also ensure fairness and reveal any liabilities that might yet be discovered.
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Review Your Financing Options
Although traditional banks can help a company with buying out a business partner, they’re usually hesitant to offer financing to small and mid-sized businesses (SMBs). In these cases, smaller enterprises might consider a loan from the U.S. Small Business Administration (SBA) in these cases. This type of loan gets its backing from the federal government, making an SMB’s application more attractive to potential lenders.
Self-financing is another choice when it comes to partner buyout financing. In this case, the departing partner would lend the money to the one remaining with the business. Self-financing typically involves making payments over time and setting up other payment terms. However, if the parties are not on good terms or have many disagreements, this form of financing is likely not feasible. Moreover, it could extend the partnership longer than everyone wants.
If traditional banks and SBA loans aren’t viable for an SMB, a buying partner can look into alternative lending like that which is offered by business development companies (BDCs). Such are more affordable, quick, and flexible. Several types of alternative lending exist for smaller companies:
Option 1: Debt Financing
Businesses that offer subscription-based products or services might qualify for recurring revenue lending. Lenders offering this type of debt financing typically use monthly or annual figures to define the amount of recurring revenue in terms of loan underwriting.
Another option is a cash flow loan. This type might be suitable for SMBs with considerable growth potential but little physical property to put up as collateral.
An SMB can use its excellent reputation or proven performance to provide backing for a debenture. However, many lenders hesitate to offer this type of financing because this loan is unsecured.
A small business home equity loan is an option for buying partners who own their homes. Instead of borrowing against their home’s equity to fund home improvements, they can use the equity when buying out a partner. However, the individual, not the business, retains the risk for a home equity loan, making this relatively risky debt.
Option 2: Equity Financing
With equity financing, the buying partner sells a number of shares to raise the cash they need for buying out a partner. The seller can go to investors to place the stocks privately. They can also go public through venture capitalists.
Option 3: Merchant Cash Advance
Buying partners can get a merchant cash advance to pay a lump sum to the selling partner. The borrower repays the loan using a percentage of their company’s income. Most borrowers don’t have to wait more than a few days to get approval. However, it can cost more than other alternative financing options.
Option 4: Mezzanine Financing
Mezzanine financing can close the gap between the cash SMBs need and the amount they currently have. The term for this product comes from existing mezzanines, which are the intermediate levels between two floors. It’s a cross between equity and debt that doesn’t have the complete backing from business assets. Instead, the value is based on cash flows.
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Review the Terms Carefully
Although the parties can rely on an attorney or accountant’s expertise when drawing up a solid agreement, the buyer should still look over the terms carefully and be as professional as possible, no matter the relationship with the seller. They should also consult with the attorney and accountant to be sure they don’t overlook any paperwork filing with all levels of government.
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Consider Dissolving or Restructuring Your Agreement
Depending on the terms of the original partnership agreement, some situations might allow all parties to part ways and dissolve the business without one partner buying out the other. Another way to circumvent the expense of buying out a partner is to restructure the agreement, with the buyer assuming most of the finances, liabilities, and decisions. Dissolution and restructuring only work if the initial deal has clear terms that stipulate what happens when a partner leaves.
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Be Prepared for Your Partner’s Absence
Securing funding to buyout a partner is only a portion of the work involved in a company break-up. The remaining partner needs to transfer all the former partner’s accounts, change the locks and passwords, and inform clients, vendors, and other external stakeholders of the departure.
The preparation for the split is where an attorney and accountant’s guidance can prove valuable. A lawyer can ensure that all required paperwork goes to the appropriate state, local, and federal government offices. Much of the work associated with a buyout or split can happen long before departure. For example, suppose the exiting party is a salesperson. In that case, the business should know how many of those clients will follow suit and how many accounts they need to replace for the company to remain operable.
Knowing how to buy someone out of a business requires knowing some essential steps. No matter how positive or negative the relationship is, both partners can get through the process in a professional and positive manner. Also, finding the right kind of alternative lending option can ensure a relatively quick partner buyout and the ability to move forward with the business.
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