How to Account for a Partner Buyout

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A partner in a business essentially represents a co-owner who, depending on the agreement, has rights and powers over a business. In a buyout, one or more partners essentially trades a financial payment for a another partner to give up his rights of ownership and business control. While this process is perfectly legal, it does involve a number of steps that need to be taken for the transfer and payment to occur correctly. Otherwise, the bought-out partner could retain some level of ownership overlooked in the process.

Identify a partner who wants to leave the shared business. Perform a discussion between all partners of the business if a buy-out is possible and how it will generally occur. Prepare a draft set of terms that everyone agrees should represent the terms of the buyout. Have a third party or auditor evaluate the business and make a financial determination of its aggregate worth.

Take the buyout terms and value report of the business to a business attorney versed in partnerships. Hire the attorney to review the general terms and prepare an actual legal agreement for the buyout. Wait for the attorney to finish the process and answer any clarifying questions she may have to produce the legal version of the agreement.

Consult with the attorney in a followup meeting to confirm exactly what the legal buyout agreement will do, transfer, and allow. Confirm these are the intentions of the partners as originally understood in Step 1.

Present the buyout agreement prepared by the attorney in Steps 2 and 3 to the target partner for review and acceptance. Confirm the target partner authorizes the agreement as well as the remaining partners. Notarize the document with the help of a public notary and legal witnesses.

Collect all signatures from the departing partner relinquishing control, ownership, and direction of the partnership and business, including any of the business’ legal assets.

Transfer whatever payment or consideration was included in the agreement to the target partner as part of the target partner’s buyout. Account for the ownership transfer based on capital worth in the accounting books as a transfer of capital to the remaining partners. Keep the total capital in the business the same.

Inform the rest of the employees in the business regarding the departing partner so there's no sense of secrecy or intrigue about the change. Craft a simple press release-type statement and distribute among staff about the departure. Throw a going away luncheon for the leaving partner if he desires, and invite familiar employees and remaining partners to attend.

Have your personnel office and IT support remove from the departing partner all access to the business, including physical and electronic passwords, keys and documents. Require all business property possessed by the leaving partner be returned and accounted for. Direct any after-the-fact external queries about the former partner to your personnel office to simply confirm past employment.

Tips

  • Having partner departures occur on amicable terms can pay off later in new alliances with the same person on new business ventures.

Warnings

  • Always have an attorney review the buyout agreement before signing anything. Legal review can catch loopholes or omissions that may otherwise create ownership and management problems after the buyout.

References

About the Author

Since 2009 Tom Lutzenberger has written for various websites, covering topics ranging from finance to automotive history. Lutzenberger works in public finance and policy and consults on a variety of analytical services. His education includes a Bachelor of Arts in English and political science from Saint Mary's College and a Master of Business Administration in finance and marketing from California State University, Sacramento.

Photo Credits

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