How to Buy Out A Business Partner

To buy out a business partner, take these steps: 1) Determine what you’re buying, e.g., customers, inventor, customers, intellectual property, etc. 2) inform the partner of your expectations, 3) Hire an attorney to draft a purchase agreement, and 4) Retain a business valuation expert.

By Douglas Wade, Attorney

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With more than 3.6 million business partnerships in the US, it is certain that many business partnerships will come to a close. Regardless of the underlying reasons, if you are contemplating a buyout of a business partner, there are several crucial factors to consider, which we will examine in this article.

Table of Contents

1. How do you buyout a business partner?

2. Prior Buyout Arrangements

3. Assessing the Business’ Worth

4. The Prospects of Your Business

5. Securing the Investment

6. Formalizing the Transaction

7. What is a buyout agreement?

8. Why is a Buyout Agreement Crucial?

9. What Constitutes a Partnership Buyout Agreement’s Terms?

Prior Buyout Arrangements

If the business was established correctly, there should exist a buy-sell agreement. This document outlines the procedures to follow when buying a partner out of a business, making it the primary point of reference. Nevertheless, in many cases, small to medium-sized enterprises are founded by close acquaintances or family members. As a result, a formal business partnership agreement for buying a partner out of a business may not always be in place, as the business is founded on mutual trust and respect. In such instances, the dissolution of the business partnership can lead to complications.

Assessing the Business’ Worth

In the event that your partner seeks to dissolve the partnership, determining a specific value for their share of the business becomes imperative. Business valuation is a multifaceted process for buying a partner out of a business, extending beyond the consideration of mere assets (such as real estate), income, and liabilities. It requires time and expertise, making it advisable to seek professional assistance. Additionally, factors like brand value, accrued goodwill, future growth potential, and the impact of the departing partner on the business must be taken into account. Given these complexities, enlisting an impartial third party to conduct the evaluation may be a prudent step.

The Prospects of Your Business

As mentioned earlier, if your business partner chooses to depart, it can significantly influence the perceived value of the business. Typically, a partner’s worth is determined by their level of involvement in the day-to-day operations. If your partner plays an active role, you must contemplate how to fill that void. Will it necessitate you to dedicate additional hours overseeing their responsibilities? Should you seek a new partner after buying a partner out of a business, or are there specific functions within the business that can be outsourced or hired for (such as accounting or marketing)? Will their absence directly impact sales, or might it open up avenues for a new business direction? In essence, you will need to strategize how to maintain business operations in their absence, both in the short and long term.

Securing the Investment

Obtaining the necessary funding for buying a partner out of a business may pose challenges if you do not meet all the lending criteria. Yet, if the business model is sound and you seek advice from a financing specialist, you stand a good chance of successfully acquiring your partner’s share. If you are committed to taking full ownership of the business, partner buyout financing could play a crucial role. In many instances, securing a small business loan can be beneficial, ensuring you have sufficient funds to present a buyout proposal.

Formalizing the Transaction

After finalizing all the agreements, it is essential to officially execute the buyout by completing all requisite paperwork. In most instances, it is advisable to engage an acquisitions attorney to scrutinize the documents for buying a partner out of a business. While your former business partner may be a dear friend with whom you’ve amicably parted ways, the future is uncertain. As a precaution, it is prudent for all parties involved to sign the business buyout agreement.

What is a buyout agreement?

A buyout agreement is a contract for buying a partner out of a business. This agreement governs the following aspects of business decisions:

Whether an exiting partner is obligated to be bought out.
The determined price for acquiring the exiting partner’s stake in the entity.
Designation of who is eligible to purchase the exiting partner’s portion of the company (this may encompass external parties or be reduced to existing partners).
Identification of other circumstances that might lead to a buyout.

Regard a buyout agreement as something akin to a “prenuptial agreement” for you and your business partners. While you may envisage your partnership enduring indefinitely, the buyout agreement outlines what will transpire if circumstances deviate from your initial plans. Please contact our partnership agreement attorney to assist you in buying out a business partner.

Why is a Buyout Agreement Crucial?

A buyout agreement serves as a guide for business partners on the way to manage the repurchase or sale of an ownership interest in the event of a partner’s changing circumstances. Without such an agreement, if a partner departs to relocate or starts a new venture, the partnership could potentially be legally dissolved. Such a dissolution might compel you to distribute profits and assets between the partners and decide whether or not to initiate a new venture with the partners that remain.

Even in cases where the partnership continues, disputes may arise regarding whether to buy out the ownership stake of the exiting partner, and at what price. Failing to anticipate and prepare for scenarios like these after buying a partner out of a business can lead to serious business and personal conflicts—potentially culminating in legal proceedings and the jeopardy of losing your business.

Moreover, a buyout agreement may regulate who has the option to join the partnership. Without such provisions, you may find yourself splitting control of the business with a person with whom you would prefer not co-manage a business.

What Constitutes a Partnership Buyout Agreement’s Terms?

The agreement for buying a partner out of a business should specify when a partner must or can be bought out of their partnership interest, as well as outline the process for effecting the buyout. By addressing these matters before a buyout situation arises, you can foster a sense of assurance that the process will be fairly equitable and relatively devoid of added animosity or resentment.

Usually, the circumstances that prompt the buyout of a partner’s stake within a buyout agreement include:

The voluntary departure or retirement of a partner.
A compelling proposition from an external party to acquire a partner’s stake in the business.
A divorce settlement where a partner’s former spouse is set to acquire a partnership stake in the business.
The foreclosure of a debt backed by a partnership interest.
The personal insolvency of a partner.
The disability, demise, or incapacitation of a partner.

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How do you buyout a business partner?