Business Partner or Shareholder Buyouts: What You Need to Know

April 15, 2020   |   Blog

As your business grows and develops, you may be asking yourself — what are the steps involved with selling my share of the business to my partner? Or maybe you’re looking for advice for buying out a business partner.

When it comes to buying out a partner in a business, there is a right and wrong way to go about it. If you can part amicably, the process will be much easier. So what do you need to know before you proceed with a company buyout?  

What to Know Before Buying Out a Business Partner

Your business partnership may be ending for several good reasons. Maybe your partner is retiring or moving away or has been presented with an opportunity they can’t pass up. Even if the split is amicable, buying out a business partner can still be an overwhelming, stressful experience. Here’s what you need to know before buying out a business partner:

Start the Conversation About the Buyout With a Positive Tone

When you’re ready to start the conversation about the buyout, use a positive tone — this is particularly important if you and your partner aren’t parting on the best terms. You may not want to open the conversation with legal jargon that’s difficult to understand, as this is likely a person you’ve built a close working relationship with over the years. 

Instead, aim for a friendly, easy-going conversation, so you can avoid angering your partner or making them defensive. During this conversation, there’s no need to bring up disagreements from the past or place blame. The focus of this discussion should be following a path that works well for both of you. 

Consider All Your Financing Options

Buying out a business partner may come with a sizable cost, and you may not be able to cover this upfront expense out of pocket. When it comes to partner buyout financing, you may want to consider self-financing. If you can’t finance the buyout yourself, you may want to consider other financing possibilities, such as a business acquisition loan. 

Schedule a Business Valuation

Bring in an independent firm that can evaluate your business. This objective opinion on the value of your business will give you and your partner a starting point for negotiating a fair buyout and ensuring this buyout will be a positive investment.   

Steps to Buying Out a Business Partner

The process of buying out a partner or shareholder doesn’t have to be mysterious or overwhelming. To buy out a business partner, you should follow these steps:

1. Determine the Value of Your Partner’s Equity Stake

What is the value of your partner’s equity position? This is the first step to calculating what the financial challenge will be. After your business is valued by a professional, you’ll be able to assign a value to your departing partner’s equity stake. 

2. Decide What the Appropriate Financing Should Be for the Buyout

The financing you select will likely be based on how much the buyout will cost, the amount of debt your company already has, your industry, your location, your cash flow and your equity. If you’re unsure what may be the best financing option, you can reach out to an experienced financial professional for help. 

3. Assess What the Transactional Approach Should Be

Determine what the transactional approach should be for financing by visiting your tax professionals and legal professionals. The form of your organization, such as whether you are a partnership or a corporation, may affect the transactional approach that is right for your company. 

4. Initiate the Financing Transactions

After you’ve determined what the transactional and legal strategies should be, you can put the process of buying out your partner in motion. If your primary bank doesn’t seem like the best option, you may want to consult with a certified public accountant or advisor from Marshall Jones, who can help you pinpoint the most favorable financing option.  

Tips for Structuring and Financing a Partner or Shareholder Buyout

Are you unsure how to structure and finance a partner or shareholder buyout? The following tips can help you during this process:

1. Select the Best Method for Financing the Buyout

You can choose between debt financing and equity financing. Debt financing tends to be more common through buyouts over time, lump-sum payments or earn-outs. 

2. Agree on Your Company’s Valuation

During a business partner buyout, a common method for valuing a business is both partners developing a valuation on their own and taking the average of both of these values. If there is too large a discrepancy between the two values or if other reasons interfere with your ability to reach an agreement, you can bring in a third party who can independently value your company.

3. Formalize the Deal’s Structure

You should also formalize the structure of your deal. To do so, you can bring in a legal professional who is experienced in acquisitions and mergers. The legal requirements vary by state, and a lawyer will be knowledgeable about what the laws are in your state.  

What You Should Consider When Buying Out a Business Partner

There are tax implications of buying out a business partner, along with other considerations. Consider the following when buying out a business partner:

Your Company’s Future

How will you be able to keep your company operational after your partner is no longer present? Is your partner very hands-on with the business? Will you need to increase your number of hours in the office or find another partner or hire new employees? Will your partner’s absence have a direct impact on your business’s sales? Or will your partner’s absence give you a chance to grow your company in another direction? 

Assessing what lies in the future for your company is an important consideration when buying out a business partner. 

Your Previous Agreements

When your business was originally formed, you may have included a buy-sell agreement. With this agreement, you can follow the protocols that were set. When buying out a business partner, remember to consider your previous agreements.

Tips for Buying Out a Business Partner to Make the Process Easier

To make the process of buying out a business partner easier, you can outsource your accounting and consult with business experts at Marshall Jones. Even during an amicable buyout and with a detailed partnership agreement, it will be in both your and your partner’s best interest to work with experienced professionals who can help you negotiate the buyout and understand all tax implications.

Get Assistance With Buying Out Your Business Partner or Shareholder

Are you looking for advice on buying out a business partner? Our Marshall Jones Certified Public Accountants And Advisors have the financial expertise to guide you through your business partner or shareholder buyout.