Buying out a business partner can often be a natural part of your business evolving, but the process should be handled carefully. A partner may decide to leave for personal reasons, such as retiring or taking a different job offer, or because the projection of the organization no longer aligns with the original agreement or vision.
No matter the reason, certain strategies will make the transition easier for all parties involved. When you know how to tactfully buy out a partner, you can create more stability for your business while equitably parting ways. This is how to buy out a business partner in a legal, ethical, and profitable way.
Know the Why
First and foremost, you need to have a clear understanding of why you’re buying out a partner so that you can establish clear goals for your business. You may be trying to get out of a bad partnership, or perhaps you would like to handle the company’s finances differently. Whatever your goals are for the future, they will be influenced by your current circumstances and the reasons behind such a big change.
To manage this opportunity in the right way, you need to know what you want so that you can figure out what you need.
- What legal documents or agreements do you need to review or revisit?
- Are there any changes you want to install because of this buyout? If so, what do you need to prepare to legally and ethically make those changes?
- What benefits of the buyout are most important?
- Is your partner completely leaving the company, or is there room for some involvement? What would this scenario look like?
- What needs to be accomplished for the buyout to move forward?
- Where are you willing to compromise?
- How can you make all parties as satisfied as possible?
Having a clear goal and answers to these questions will help you be all the more confident in your decision-making and requests. Ultimately, the “why” of the buyout will help direct both current and future plans.
Communicate with your Business Partner
Communication between business partners is key to maintaining a smooth buyout process. Even if you are splitting ways under less-than-ideal circumstances, you can still be clear about expectations. Especially if you’re instigating the buyout, approach your business partner as early as possible to avoid blindsiding them. Coming to a mutually beneficial understanding before having to involve lawyers is the best-case scenario.
When you do have conversations about the buyout, be direct and honest about your reasons, your goals, and your expectations. Do your best to avoid accusations and hostility; instead, be intentional, respectful, calm, collaborative, and professional. The more rational and level-headed you are, the better negotiations will go. It’s also wise to record your conversations in some form or another that documents your main discussions, potential areas of conflict or concern, what you can agree on, etc.
Remember: your goal is to find a solution that benefits both parties. Start with common ground and go from there. The more you sincerely communicate with your partner, the less competition and confrontation you’ll have to deal with.
Use Professional Assistance
Even in the most congenial conversations, it’s still a good idea to have an unbiased mediator to help ensure a productive and ethical collaboration. Especially if there is a lot of tension or complicated feelings, bring in a third party early on to avoid major conflict. Outside of a mediator, other third-party associates should be involved. You’ll usually need at least a lawyer and an accountant to fully prepare for and complete negotiations.
The last thing you need is a small legal mistake that costs you in the long run, so it’s essential to hire a trustworthy attorney that has experience with mergers, buyouts, and similar cases. An attorney will be your main guide in navigating legal requirements or conflicts, keeping records, and finding the best buyout agreement for you and your business partner.
Rely on your attorney especially for constructing the buyout agreement, which should outline both the financial and non-financial consequences. This might include the roles of both parties, both partners’ involvement post-buyout, potential clauses that protect intellectual property and rights, etc. This is an essential step to prevent lawsuits in the future.
An accountant will also help you determine your options when it comes to finances. Tax returns, profit and revenue hurdles, assets and liabilities, fair market value, your equity state, and how the buyout will affect your business are just some of the financial strategies an accountant can advise you on. Even buying a small business comes with a lot of paperwork and money management, so rely on experts to get a proper valuation of your business.
The bottom line: clarity is everything when it comes to agreements like this. That’s why having competent professionals is crucial to avoid future issues. Even if you’re parting on good terms now, you should carefully consider the verbiage of your legal agreement, the terms of ownership, and the expectations and responsibilities of both parties moving forward.
Anticipate the Effects
The buyout could have all sorts of repercussions, both exciting and demanding. If you’re buying out a partner in a small business, you’ll likely have much more responsibility and much less time. There will be personal effects that you should be prepared for.
At even higher stakes, there are business-related effects to consider. For example, your entire business structure may change by moving to a single-member LLC. You may not have the funds to fully support the buyout, which means you need a plan in place to maintain the demands of the business.
You’ll need to update all official documentation, inform important clients or customers, work closely with your accountant on tax documents, know how to manage cash flow, etc. Essentially, have a plan for both the personal and business changes headed your way.
Get Financial Assistance
Buying out a business partner isn’t a small task and it’s often a calculated risk, which means that getting financial assistance is a crucial final step in making the buyout process successful. With the right consulting and financial backing, you can elevate your business and appease both parties.
You can self-finance by treating your partner like a lender and paying them back over time, but this is usually only an option if you have a positive and healthy relationship with them. You can take out a loan with the bank, but these can be difficult to qualify for if it’s not for the direct growth of your business.
If you don’t have the cash to buy out a partner, consider a small business loan with National Funding. Our loans help you maintain your independence from your business partner (and other outside investors), protect your personal finances as you take on more risk and responsibility, and cover the costs during such a transition.Talk to one of National Funding’s experts today to ensure that you receive the best loan for your business buyout. Apply for funding today!