How to Buy out a Business Partner

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There are multitudes of reasons why a person may want to relinquish his interest in partnership business. If changing the weight of the partnership to provide a way for a less-committed partner to remain involved with less operational or financial control isn’t an option, a buyout can prevent having to dissolve the business. The Small Business Administration recommends that all parties consult with a lawyer before buyout proceedings begin.

Follow Buy-Sell Agreement Terms and Conditions

If you have a buy-sell agreement, either as a standalone document or as part of your partnership agreement, review its terms and conditions. These typically either provide a specific sale price or include a formula for determining the sale price of each partner’s interest, state whether an outside third party can buy the departing partner's share of the business or whether the sale applies only to existing partners. Some agreements also include an agreed-upon structure for financing a buyout transaction.

Get an Independent Valuation

Contact an independent, third-party business appraisal or valuation company. This step is vital even if there is a buy-sell agreement in place, as it can protect both partners and ensure valuation is accurate and fair. An alternative option that may be helpful if you don’t have a buy-sell agreement or to prevent ongoing arguments, is to get two appraisals and use an average to set the business’s value. Otherwise, set the purchase price at the single appraised value.

Financing and Payments

Decide on financing options that work for both partners. This can include a private loan in which an incoming partner pays the required amount in advance. If you’re not bringing in a new partner, another option is to leverage the business assets to obtain enough cash to complete the buyout and then use the business' cash flow to repay the loan. A third option is structure an installment agreement with regular monthly or quarterly payments. Most installment agreements run for a specified period and end with a final balloon payment.

Write a Buyout Contract

Work with an attorney to draft a buyout purchase contract. In addition to including the terms of the buyout and financing and payment terms, include any other necessary provisions, such as non-compete or confidentiality clauses. Before completing and signing the final purchase agreement, it may be helpful to draft a non-binding letter of intent. A letter of intent describes the status of negotiations, giving each partner a chance to review the contract as it currently stands and decide whether to move forward with drafting and executing a final partnership buyout agreement or continue negotiating.

References

About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

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