Tips on How to Buy out a Business Partner or Shareholder

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Buying out a business partner or shareholder in your business is never an easy decision. But sometimes, tough calls need to be made. These decisions may cause momentary disruption. They may result in some temporary business losses. But taking the step now could safeguard your business interests in the long run.

As a business owner, the best thing for you is to plan the transition strategically. Of course, you have to make sure you’re doing it for reasons that will benefit the business. Here are some key steps to help navigate the transition and make sure things don’t get messy.

1) Drill down the balance sheet

The first step is to understand your business’ valuation. This means tallying the value of everything the business owns – equipment, inventory, and assets. Subtract liabilities and debts.

The second aspect is to gauge what your partner brings to the table. It could be expertise in a certain area, a resourceful business network, or independent ownership of certain assets leveraged by the business. Evaluate how the absence of your partner will impact the business and what steps need to be taken to sustain it after your partner makes an exit. This undertaking establishes the foundation or framework for you to take key decisions related to the partnership.

2) Get the right support team

It’s important to have the right support team batting for you, as every decision made is crucial to the sustainability of the business. Trust, skill, and expertise are some of the core values this team must bring to the table.

  • This can include hiring a legal professional such as an acquisitions attorney who is savvy in navigating Limited Liability Company (LLCs) partnerships. Dissolving partnerships come with many rules and regulations, and you may want to exercise due diligence when making a fresh start.
  • You will need an accounting professional who can crunch all the numbers and understand the business.
  • You will need to choose a Registered Agent for your LLC in the state where your company is registered. For instance, a Texas-Registered Agent will accept legal mail on behalf of your Texas-based LLC if your business gets sued.

3) Determine if a buy-out is the right step

Now that you have your A-team on board and have completed your valuation, you have the framework in place to understand if a buy-out is the best move.

  • It’s possible that you already have a well-designed partnership agreement in place, which clearly states the terms in case a partner wishes to dissolve the partnership. In this case, the terms and conditions are well-laid out, and you can follow the steps mentioned in the original agreement.
  • A second scenario could be that your partner wants to close down the business. In this case, you can convince your partner to stay in the partnership but take a backseat when it comes to active participation. This means you will need to take on the lion’s share of decision-making, liabilities, and day-to-day management of the business. This is a less expensive alternative to a buy-out.

If you believe a buy-out is the only way forward, then it’s time to strategically plan for it.

4) Identify potential obstacles

Dissolving any partnership can come with certain obstacles, and it’s a good idea to be mentally prepared. For instance, it is possible that your partner will not want to be bought out and might be interested in buying you out. If your partner rejects your offer, you’ll need to explore other options. For instance, you might consider selling your stake and moving on to start a new business.

  • The key to making the right decision lies in gauging your partner’s intentions correctly and arriving at a conclusion that is a win-win.
  • Broach the topic with caution and clearly state your reasons for suggesting the buy-out and how it can positively impact the business.
  • Exercise patience during negotiations, and don’t be in a hurry to close things.

5) Plan for the funding

A buy-out comes at a cost, and it is essential to plan how you aim to fund it without breaking the bank. There are several options to consider. The best is to pay in cold hard cash. The other alternative is to consider taking out a small business loan. Shop for the best interest rates and payment terms.

You can also negotiate a payment structure with your partner that allows you to stagger the payments. For instance, you could pay 40% upfront and make the remaining payments over the next five consecutive years. Put it all down on paper, and make sure it is practical enough for you to honor it.

6) Play nice

Many promising partnerships go up in flames due to poor communication, lack of transparency, and mismatched expectations. Even though you may plan to buy out your partner, try not to burn bridges and keep things amicable. Practice active listening to understand what your partner wants and arrive at a fair offer. This is the best scenario where your partner might agree to your terms and conditions, enabling you to get your company back.

7) Tie up all loose ends

Close all legal, financial, and official loops once your partner agrees to your terms and conditions. This mitigates the potential for future chaos or even loss of business.

  • File all the paperwork required at various levels – it could be local and state authorities, insurance requirements, and other areas.
  • Do a complete sweep to ensure that your partner’s name is removed from all legal documents.
  • Ensure that changes in business-related bank accounts are executed on time.
  • Another aspect to consider is conveying the news to your team and mapping out new reporting structures and processes. This will lead to a smoother transition.

The Takeaway

A partner buy-out may seem like a large undertaking, and in many ways, it is. But a systematic step-wise approach leads to a smooth transition and creates a roadmap for a fresh start to the business. Under your leadership, the company can skyrocket to new heights.

Author Bio:

Matt Horwitz

Matt Horwitz is the founder of LLC University, a website that teaches people how to form LLCs. Matt is the leading authority in LLC education and is featured in CNBC, Yahoo Finance, Entrepreneur Magazine, and US Chamber of Commerce. Matt holds a Bachelor’s Degree in business from Drexel University with a concentration in business law. LLC University®, established in 2010, was the first company to create free LLC courses in all 50 states.

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