Because there are over 3.6 million business partnerships in the US
, it is inevitable that some of them will come to an end, just like a marriage. Regardless for 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 in Partnership Buyouts:
1. Previous Buyout Agreements
If the business was set-up correctly, then there should be a buy-sell agreement in place. This will provide protocols to follow in the event that one partner wants to sell their part of the business, so it should be your first point of reference.
However, many small to medium sized enterprises are formed by friends and family members. Due to this, 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, then things can get complicated.
2. The Business’s Value
If your partner wants to dissolve your partnership, you'll need to come up with a set value for your partner's share of the business. Valuing a business can be complex, as it isn’t just the assets (like real estate), income, and liabilities that should be taken into consideration. Determining what your business is worth takes time, so it can be beneficial to get a professional to assist you with this task.
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 part 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 your business partner is very hands-on, then you should consider how you’ll fill that void. Will it require you to spend more hours in the office managing their tasks? 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 take the business in a new direction?
Overall, you’ll have to determine how you can keep the business operational in their absence, in both the short and long-term.
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. In many cases, it can be useful to take out a small business loan
so that you have ample funds to make a buyout offer.
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. In most cases, you should hire an acquisitions attorney to review the documents and ensure all paperwork is legal.
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 should sign the parting documents.
Are You Prepared to Buy Out Your Partner?
It can seem daunting to begin the buyout process. 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 March 2022.