Business partnerships end for a number of reasons. Some are friendly and in the best interest of both parties - while others reach a bitter, nasty end. Even the COVID-19 pandemic and the related lockdown have forced directors to evaluate their interests and involvement.
Whatever the reason for the breakup of a partnership, if you want to keep your business, but your partner has to go, we’ve listed four considerations for successfully buying out your business associate.
How to do it
Agree on the Terms and Get Expert Assistance
When you began your venture, hopefully, you and your business partner drafted a strategy as part of your founding documents that outline how you’ll run the business, share decisions and divide responsibilities. A well-written partnership agreement or shareholders agreement should also include an exit strategy and rules for such exit.
You can think of your dissolution strategy as an antenuptial contract for your business partnership. It provides a clear exit strategy so that you're not stuck negotiating how to part ways amid hard feelings.
If you and your business partner(s) have been operating without a partnership agreement, speak with an attorney before moving forward with buyout negotiations. And even if your relationship with your partner is amicable it is in everyone's best interest to involve an experienced legal advisor to formalize your buyout.
Get an Official Business Valuation
To determine a fair price for your partnership buyout, and in ensuring that buying out your business partner is a good long-term investment, it is important to know exactly how much your business is worth. You can do this by asking your legal advisor or accounting professional to perform due diligence to help determine the value.
Whenever a director or shareholder in a small company wants to leave, it is usually preferable for their shares to be sold to the company or the remaining shareholders who will continue running the business. Once a price has been agreed upon, you can consider whether the company will buy back or purchase the shares, or whether the remaining shareholders should buy them.
In practical terms, private company share sales to remaining shareholders are simpler to administer than a company share buyback, but there may be tax benefits in structuring the deal as a company buyback.
See the Buy Out as a Pivot Strategy
In the face of unprecedented pandemic challenges, companies are being asked to restart their operations and help bring the national economy back to life. The challenge is complicated by uncertainties about the progression of COVID-19 and its long-term effects.
But this also presents an opportunity for many companies to begin building the competencies they wish they’d invested in before: to be more digital, data-driven, and in the cloud; to have more variable cost structures, agile operations, and automation; to create stronger capabilities in e-commerce and security. Partner buyouts can help to focus your business’ energies by removing anything that impedes your long journey of wider transformation.
Research the Different Buy Out Funding Options
Of course, to go through with buying out your partner, you'll need to acquire the funds to do so. There are several lending options available, including the option of a short-term business loan.
Lenders will be interested in how the capital will boost profits for your business - profits you can use to make your loan payments. And, because a buyout doesn't actually infuse any new money into the business or financially benefit the business directly, it will be important to package your business case within the context of your ultimate growth strategy. Your lending professional will go through the numbers and options with you as it will be in their best interests to ensure that the buyout is a success – a turbo-boost for the business!
Get in touch with the CorpFin team today.