What to Know Before Buying Out a Business Partner
April 12, Business partnerships can end for any number of good reasons. A senior partner decides to retire.
A beloved partner moves away for family reasons or is faced with a life-changing opportunity. Buying out a partner in these circumstances can still be stressful and involved, but the experience is typically a positive one. Other partnerships can come to a less amicable end, as personality conflicts or an erosion of trust leads partners to go their separate ways.
Everything You Need to Know About Business Partnerships
In the worst of these circumstances, the partnership breakup can become heated, messy and often personal. Regardless of why you are seeking to buy out your business partner, the best steps to take can, for the most part, be the same.
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Here's what you need to know:. If you are even considering buying out a partner, it's a good idea to start the process by consulting an experienced business acquisitions attorney. Business partnership laws can vary from state to state, and the terms of your initial partnership agreement will to some degree dictate your buyout options. Talking to an acquisitions attorney from the beginning can help you make a plan and be aware of any potential challenges before you approach your current business partner.
Do I really need to bother with an attorney? Even in the best of circumstances, buying out a partner can be a highly technical negotiation. Like hiring a real estate agent to buy a house, working with an acquisitions attorney can allow you to maintain a positive relationship with your soon-to-be-former partner while these third parties haggle over the details. Consulting a lawyer will likely be a big help to you, and when the conversation arises, consider encouraging your partner to do the same.
When it comes time to approach your business partner about the buyout, don't start the conversation speaking legalese! This is presumably a person you've worked closely with for a long time, so to every extent possible, the exchange should be an amicable one among friends.
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But if you and your partner aren't currently on the best of terms, it can be all the more important that you start the buyout conversation with a positive tone. Angering your partner or putting them on the defensive will only lead to a bitter and more drawn-out breakup—and may even cost you more money.
Avoid the temptation to bring up past disagreements or assign blame. Instead, focus on a path forward that will work well for all involved. Once you and your partner are in agreement about moving on from the current partnership, you're ready to bring in attorneys from both sides to negotiate a path forward.
To get an objective idea of what the business is worth and to make sure buying out your partner will be a good long-term investment, consider bringing on an independent valuation firm to perform a formal business evaluation.
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In this process, the firm generally will estimate expected profits for the foreseeable future, then discount that projection by the expected rate of return. This independent valuation will offer a starting point to negotiate a fair price for your partnership buyout. While the business valuation is important, it's by no means an exact science. Outside factors like your business partner's personal connections or expertise could impact the company's future value once he or she is out of the picture. Of course, in the ongoing dance of a business valuation, the partner buying out often wants to assign a lower value to the business, while the partner being bought out generally seeks a higher value.
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