Business ventures don’t normally remain the same over time, and nor do their owners/managers. There are many reasons why business partnership agreements end.
There may be a difference of opinion between you and your partner, or perhaps they are looking for a new opportunity. To continue the business, you’ll have to either buy out the existing partners or acquire the company.
Partner or shareholder buyouts involve many steps and potential risks. Find out what you need to consider in the following paragraphs.
A business partner is a codirector or major shareholder of your company for the purposes of this article. In a partnership structure, there are no shares to buy, so the following processes do not apply.
Should you buy out your business partner?
Most directors buy out their business partners because they no longer share their passion for the business or interest in it. There may be disagreements over direction or poor motivation, or they may simply be bored with the work. Even if you both have divergent views, you may want to discuss whether you should part ways if you have been pulling in opposite directions for some time.
Most buyouts are a win-win situation, so parting doesn’t have to be acrimonious. A controlling interest is awarded to the director with the most passion for the business, whereas the other director is rewarded for their hard work by moving on to a new endeavour or retiring early.
Only if you both feel equally passionate about the business, but for different reasons, and you both want to buy out the other, would things become fractious. Bringing in a third party who is impartial can help find a middle ground to satisfy both parties in such a situation.
What are the positives of buying out a business partner?
It may not be possible to simply end the relationship with co-directors (for whatever reason) if you have invested a lot of time and energy into the company. You and your employees are likely to depend on your business for their livelihood.
It is possible to end the business partnership by buying out your co-director. Your contracts and profitable activities will be under your sole control.
Essentially, you can become the sole shareholder by buying out your business partner. As the owner, you are free to set the direction, make changes to services or products, and generally manage your business as you see fit. You can make your business more agile by streamlining leadership and decision-making processes.
Could there be any negatives?
Your life may also become more complicated if you try to buy out your business partner. You may have a problem with your personal relationship with your co-director as a result. A disagreement at this stage will likely lead to further problems in the future, so you need to approach the topic carefully.
Additionally, you will be responsible for the business’ performance and financial health. Your company’s debt and liabilities, along with compliance, expenses, and third-party contracts, will now be your sole responsibility, depending on the type of business insurance you have. Consider dissolving the company and going your separate ways if this sounds too risky.
What steps do you take to buy out your co-shareholder? Follow these following steps to get started.
Figure out the value of your company
As a first step, you should obtain an accurate business valuation. All parties will be on the same page from the beginning, and you will be able to set a fair price for the buyout. Taking sole ownership of the company can also help you determine if it’s a good investment for the long run.
A formal business evaluation should be conducted by an independent valuation firm. After valuing and discounting all the profits you expect in the future, they will determine the value of your current profits.
Your partner’s deal may also be affected by this company valuation. You might see your valuation drop if they leave, for example, because their departure would lower future cashflow.
Hire a buyout solicitor with experience
An acquisition or buyout process will most likely only occur once in a person’s lifetime. An experienced buyout solicitors, however, will likely have helped hundreds of clients successfully complete the process. The most amicable and the most contentious buyouts will have been experienced by them.
Using a buyout solicitor is not only advantageous because of their experience, but there are a few other advantages as well. A partnership buyout can be negotiated on your behalf by them. Even if you and your partner have a wonderful relationship, formal proceedings are in everyone’s best interests.
Furthermore, they will ensure you follow all the relevant rules and tick every compliance box.
Think about some of the other options
It may be possible for you to buy out your fellow director(s) without requiring additional funding. It is necessary to explore your options for financing a partnership buyout if this isn’t the case. A tax accountant can help you determine the best strategy for your situation.
A small business loan may be available if you have a profitable operating history. In general, lenders will not provide loans to businesses that are servicing buyouts since they will not benefit the business and may lead to diminished cash flow. This type of funding is becoming more popular with alternative lenders.
This same reason can make equity funding difficult to obtain as well. A company buyout is not a good investment for investors who expect a strong return. A long-term payment plan instead of a one-time purchase may be more appealing to your business partner.
Negotiate the terms of the deal
It can be beneficial to have your buyout lawyer lead negotiations since there could be many details and technical considerations to deal with. The first step is to ensure that each party is clear about their financial obligations. It is important to have a written agreement that specifies how much will be paid when and how.
A lack of clarity can result in delays and disagreements. In addition, ensure that all issues regarding liability are handled before your co-director leaves. Lenders, mortgage providers, suppliers, and clients are not going to want to have any more financial obligations.
Intellectual property is another issue that many buyouts must deal with. You may want to keep the rights to your business partner’s invention if they claim to have developed an important idea or product.
A valuable asset, on the other hand, may require you to retain the intellectual property. Therefore, valuable assets (such as IP) should be listed as company assets rather than individual directors’ properties on the balance sheet.
Your co-director’s network of business relationships over the years is also a potential stumbling block. It is possible that some clients will no longer renew their contracts or initiate new projects without that individual. Take the time during the negotiations to go over all the details of the transition.
Reach an agreement
By structuring your agreement properly, your solicitor will ensure that it meets all legal requirements and will reduce the risk of future disputes. The use of non-compete agreements is an example of this. Upon the completion of the deal, both parties will not engage in direct commercial competition with each other.
It is time to sign the agreement once all parties are satisfied with it. As a result, the partnership buyout agreement is now official, and you are on your way to completing the process successfully.
Rising the buyout funding
When it comes to raising the necessary funding for a business partner buyout, entrepreneurs have a variety of financing options available. One popular method is bank financing, where the buyer borrows money from a bank or other financial institution to purchase the partner’s equity. This can involve traditional loans, lines of credit, or other types of financing that require collateral or personal guarantees. While bank financing can be a reliable source of funding, it can also be challenging to qualify for, especially for small businesses.
Another financing option for a business partner buyout is seller financing, where the departing partner agrees to provide funding to the buyer over time. This can be a particularly attractive option for buyers who may not have the necessary funds to purchase the partner’s equity outright. However, it also places additional financial risks on the buyer, as they may have to make significant payments to the seller over an extended period.
In addition to bank and seller financing, other financing options include invoice finance, acquisition finance, and leveraged finance.
- Invoice finance involves selling invoices to a third party at a discount, providing the buyer with immediate cash to fund the buyout.
- Acquisition finance is specifically designed to finance the purchase of a company or business unit and typically involves a combination of debt and equity financing.
- Leveraged finance involves using debt financing to fund the buyout, with the acquired company’s assets serving as collateral for the loan.
Ultimately, the financing method chosen will depend on the specific circumstances of the buyout and the financial goals of the business.
Transfer the funds and business
Finally, the money needs to be sorted out. Your accountant will transfer all financial accounts to your name and ensure the departing director receives their money. After that, you just must change the locks, update your company information, and get to work.
Is a shareholder buyout the right option for you?
Before committing to a buyout, you should explore all options. You should discuss what your business goals are with your accountant and partner. Allowing your partner to step away may be possible in another way.
What are the alternatives to partner buyouts?
If you don’t want to buy out your business partner, there are other ways you can reduce their involvement and influence:
- A partnership agreement can be modified so that you are responsible for most decisions, finances, and liabilities
- The partnership agreement may need to be dissolved, assets split, and both partners separate (this could be the best option if the valuation is lower than expected).
- A management buyout, where the existing management team purchases the ownership stake of the departing partner, can be an attractive option for business owners who want to maintain continuity and control over the company.
If you’re unsure what route to take, talk to your accountant.
Frequently asked questions
How do you determine the value of the business for a buyout
There are several methods for valuing a business, including the income approach, market approach, and asset approach. The income approach involves analyzing the business's future earnings potential, while the market approach compares the business to similar companies that have been sold recently. The asset approach involves determining the value of the business's tangible assets. It's important to work with a qualified appraiser or accountant to determine the appropriate valuation method for your specific business.
What legal documents are necessary for a business partner buyout?
The legal documents necessary for a business partner buyout may vary depending on the nature of the business and the specific terms of the buyout. However, some of the essential documents may include a buy-sell agreement, a transfer of ownership agreement, and updated articles of incorporation or partnership agreement. These documents should be drafted and reviewed by a qualified attorney to ensure that they are legally binding and protect the interests of all parties involved
How can I finance a business partner buyout?
Financing a business partner buyout can be a complex process that may involve a combination of financing options. Some possible sources of financing include bank loans, seller financing, equity financing, and asset-based financing. It's important to work with a qualified financial advisor to determine the most appropriate financing options for your business and to ensure that you have the necessary resources to complete the buyout. Additionally, you may need to negotiate the terms of the buyout with your partner to determine an acceptable payment structure.
Buying out a business partner can be a complex process that requires careful planning and negotiation. It often involves the transfer of ownership or equity from one partner to another, and the valuation of the business is a critical component of the transaction. A buyout can be initiated for a variety of reasons, such as the desire to have more control over the business, disagreements over the direction of the company, or a partner’s retirement or departure.
In addition to financial considerations, it’s essential to establish clear legal terms and agreements to protect the interests of both parties. The process of buying out a business partner should be approached with patience, communication, and a commitment to finding a mutually beneficial solution.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.