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So, you want to buy out your business partner but do not know where to start. It is normal, the process can be complicated. To minimize potential issues, it is critical to approach a buyout with care and having a strategy. If you are considering changing your business partnership by buying out another partner, the following six steps will ensure you have a smooth transition.
Figure out what you want from a buyout
Before you get started, think about why you are interested in a buyout first. Do you want to change the direction of the company such as leaving a bad partnership or do you want more financial control?
By understanding your own goals and motivations, you will determine your deal breakers and asses where you would be willing to compromise. After that you can approach your business partner with ore confidence and clarity.
Communicate your expectations
If you and your business partner can reach a mutual understanding before lawyers get involved, the buyout will be easier. Start by communicating with your partner early, and speak calmly as you explain your goals, position, and expectations.
Be prepared to say why you want to buy your partner out and get input from your business partner. It is a good idea to document the conversation by taking notes. Having a record of your points of discussion, areas of agreement, and potential concerns can serve as a starting point for negotiations.
Consult a business attorney and accountant
It is crucial that you bring in a professional like an attorney or an account because partnership buyouts can become tricky and contentious.
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 will help you understand the buyout from a financial perspective. An accountant will go over your personal financials, profit and losses, cash flow, equity stake and sales forecasts of the company post-buyout.
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 the financial health of your business.
A valuation company will review your balance sheets, cash flow forecasts, and sales or revenue to assess your business’s worth. 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.
Clarify the terms of your buy and sell agreement
A buy and sell agreement is the basis of a successful partnership buyout. By defining the partners role and responsibilities with the business post-buyout can help prevent lawsuits and complications down the road.
Research financing options
You might not have enough money to buy your partner’s share of the business outright depending on what your personal savings and company finances look like. If this sounds like you, here are some of the best options for funding a partnership buyout.
- Bank loan – banks offer affordable interest rates; however, they are hard to qualify for in a partnership buyout because you are not using the money for growth or working capital.
- Pay back your partner in installments with interest – pay back your partner over time because it is a good option if you cannot qualify for a loan, but it also means you have to maintain a professional relationship with your partner for years post-buying.
- Sell your partner’s shares or interests to an outside investor - equity financing is a great way to gain access to sizable capital. You still end up sharing control over the company, since you’d essentially be exchanging one partner for another.
