Forming a business partnership is an act of inspiration. Ending a business partnership, for many, can be a difficult time. While some business partnerships run their natural course, ending in a planned and methodical manner, more often buying out a business partner is sudden.
In the face of swirling emotions and pressure on the day-to-day operations of the business, it’s important to get the situation resolved right away. At the same time, buying out a partner uncovers a series of complex questions:
The answer to these questions will inform everything from buyout structure and financing to conducting valuations and outsourcing expertise. To help you navigate the process of buying out a partner, here are several important factors to consider:
Buyout as a Strategic Tool
Buyouts can be sparked by disagreeing siblings or antagonistic partners. They can also be a natural evolution of the business, brought on by growth or the need for change. It’s important to view a buyout as a strategic tool for ensuring the long-term viability of your business.
Here are some strategic uses for a buyout:
Buy-Sell Agreements Help– If They Exist
A detailed buy-sell agreement, negotiated at the start of the partnership, can ease the burden of buyout. This document outlines the structure and terms of sale, including the financial payout timeline.
The buy-sell agreement may also include relevant riders, such as a noncompete clause or a stipulation that the family of a deceased partner be bought out at the time of death. If these terms are in place ahead of time, they can circumvent lengthy negotiation. However, the buy-sell agreement isn’t a guaranteed solution.
For starters, many businesses don’t have a buy-sell agreement in place, especially with early investors. Negotiating upfront with family and friends can feel unsavory, leaving the door open for future conflict.
Additionally, even where a buy-sell agreement has been reached, there may be unresolved terms. It’s difficult to address every possible scenario ahead of time. For example, if fraud is not specifically mentioned in the agreement as cause for termination, a company may be left without recourse if a partner embezzled funds or otherwise acted unethically. It’s important to, whenever possible, anticipate future conflicts and get a detailed buy-sell agreement in place. At the same time, recognize that even the most in-depth agreement may not cover every possible scenario.
Financing the Buyout
Next, it’s time to consider paying for the buyout. This process involves structuring the terms and form of payment. The key here is to align with the interests of the parties involved. For example, a lump sum cash payment could work best. This one-time payment eliminates all ties between the partner and the business, freeing both sides to move on. At the same time, a lump sum payment requires access to upfront capital, which can be out of reach for many businesses.
Alternatively, if a partner passes away, you may look to structure payout to ensure the wellbeing of the partner’s family. Installment payments provide a reliable, steady income to help the family secure their financial future and allow the business time to gather capital. When approaching financing options, consider the tools below:
The financing tools owners have at their disposal include:
Owners also have a choice in how they pay the exiting business partners, including:
Bringing in Professional Services
Given the complexity of a buyout, and its importance to the long-term health of the business, many owners enlist support from service professionals. Lawyers, investment bankers, and other service providers can help you navigate the buyout process, especially if no buy-sell agreement is in place.
Service professionals provide the following:
Bringing on the right partner can help you tackle the buyout quickly and efficiently. A partner that understands your goals and brings a wealth of experience will work to protect your business interests and pursue a win-win resolution.
At Comerica, we’re the partner in your corner. Our team of experts can help you at every step of the process, from putting together a buy-sell agreement to structuring future payments. Visit comerica.com/businesstransition to get started.
NOTE: IMPORTANT INFORMATION
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