What to Consider When Buying Out a Business Partner
With there being over 3.6 million business partnerships in the US at the last count, it is inevitable that some of them will come to an end, either with a feeling of goodwill or in an acrimonious way, just like a marriage. Regardless of the manner of the breakup or the reasons behind it, if you’re considering buying out a business partner, there are a few key points that you should keep in mind, which we’ll review in this post.
5 Factors to Consider Before Buying Out Your Business Partner:
1. Previous Agreements
If the business was originally set-up correctly, then there should be a buy-sell agreement in place. This will provide protocols to follow in the event of one partner wanting to leave the business, so it should be your first point of call. However, many small to medium sized enterprises are formed by friends and family members, so a business partnership agreement isn’t always created since the business is built on mutual trust and respect. In this case, if the business partnership breaks down in a bad way, then things can get nasty.
2. The Business’s Value
If one partner doesn’t want to be involved anymore, then you need to come up with a value for their share of the business. Valuing a business can be complex, as it isn’t just the assets, income, and liabilities that should be taken into consideration. In addition, you must consider the value of the brand, ‘goodwill’ the business has, future growth potential and any impact the partner leaving will have on the business. This can make valuing the business yourself difficult, so it might be worthwhile to hire an independent party to conduct an evaluation.
3. The Future of Your Business
As referenced above, if your business partner wants to party ways, it could make the business appear more or less valuable. The business partner’s value is normally determined by how active they are in the day-to-day running of the business. If they are very hands-on, then you’ll need to think about how you’ll fill that void. Will it require you to spend more hours in the office? Do you need to find another partner, or are their specific areas of your business that you can hire employees for (accounting, marketing, etc.)? Will it have a direct impact on sales, or will their absence allow you to grow the business in a new direction? Overall, you’ll have to determine how you can keep the business operational in their absence.
4. Financing the Deal
Partner buyout financing can be tricky to obtain in some circumstances if you don’t meet all of the lending requirements. However, if the business model stacks up and you get guidance from a financing expert, then you should be able to achieve your goal of buying out a business partner. If you’re serious about assuming full-ownership of your business, partner buyout financing may be a necessary component in the process.
5. Making it Official
Once all the agreements have been put in place, you need to make the buyout official, which involves completing all the necessary paperwork. Your ex-business partner might be a good friend who you’ve parted with on friendly terms, but you don’t know what the future holds. Therefore, you should have all parties legally sign the parting documents.
Are You Prepared to Buy Out Your Business Partner?
It can seem daunting to begin the process of buying out a business partner. Fortunately, if you follow these steps, you’ll be able to make it a stress-free process. Then, you can get back to focusing on the future of your flourishing business!
Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2018.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.