How to Buy Out a Business Partner in Denver
Like an estranged couple, business partners can grow apart for many reasons. In fact, some lawyers even refer to a buyout as a business divorce. But business buyouts don't need to be messy or stressful. Instead, you should look at a buyout as an opportunity to move your business forward.
However, even if you take a positive approach to your business buyout, you still need a knowledgeable and experienced Colorado commercial lawyer. Your attorney will listen to your concerns and structure your deal so it meets your goals and does not hold back your business. Whether you have a partnership, limited liability company, or closely held corporation, your lawyer can advise you through the process of buying out your business partner.
When to Buy Out Your Business Partner
You should consider buying out a partner any time staying together will hold back your business. Some popular reasons why you might want to buy out your business partner include:
- Disputes over the division of labor
- Disagreements over long-term business goals and plans
- Financial disputes
- Loss of interest in the business
- Lack of commitment to the business
- Differences in business visions
Sometimes, it might just be as simple as a feeling that you don't want to have a partner anymore.
Fortunately, you don't need a reason to buy out a business partner. You don't need to prove fault or even explain why you want a buyout. You just need to trigger the buyout process outlined in your partnership agreement, operating agreement, corporate bylaws or shareholders agreement.
If you don't have an agreed-upon buyout process, you face a more difficult path. However, no one can force you to stay with a business partner if either of you needs to separate. You and your commercial attorney can always find a way to buy out a partner. The only question is what you will pay and what you get for your payment.
Steps to Buy Out a Business Partner
Buyouts require you to make both legal and business decisions. Here are some steps you will need to take to buy out a business partner:
1. Determine What You Want from the Buyout
You need to know where you'll stand when the buyout is said and done. Therefore, you should think about what you want after completing the transaction.
Some issues to consider include:
- Which partners to retain (if you have multiple partners);
- Ownership of business property;
- Ownership or licensing of intellectual property;
- How much debt you and the business will have after the buyout;
- The amount of capital you need at the end of the buyout.
For example, suppose your partner invented your company's products. In this case, you would need to consider how to get all the rights necessary to continue selling the products after the buyout.
2. Consult an Experienced Acquisitions Attorney
An experienced acquisitions attorney will have the experience of hundreds or even thousands of buyouts to draw on for ideas. The lawyer will also know what issues could arise and how to avoid them or minimize their impacts. Finally, a lawyer can help you solve the problems that inevitably arise during your transaction.
When you consult an attorney, provide them with a list of your goals and issues. The lawyer will be able to use this to efficiently control your costs. The more precise you are with your goals, the more the business attorney can focus on them during the negotiations and drafting of the buyout agreement.
3. Communicate Your Expectations with Your Business Partners or Shareholders
How and when you communicate with your business partner can determine the tone of the entire transaction. As such, it's not a matter you should treat lightly.
Partners on amicable terms should be able to discuss a buyout openly. Of course, your partner might already know (or at least suspect) that you've been thinking about a change to your business partnership. Just make sure to talk to your lawyer about what you should discuss with your partner before you have the conversation with your business partner.
If the relationship has already broken down, you may want to have your lawyer communicate with your partner. A business attorney can communicate objectively without getting caught up in any extraneous issues.
4. Get an Independent Valuation of Your Business Partnership
Your operating or partnership agreement should include a process for calculating a buyout price. If it doesn't, you will need to negotiate a price. In either case, you'll need an independent valuation company to calculate the fair market value of your business.
This valuation will consider your assets, including accounts receivable, cash on hand, and the fair value of any business equipment. It will also consider your liabilities, such as accounts payable and debts. The valuation will measure your revenue, profits, and cash flow.
Based on the valuation and your partner's ownership percentage, you can calculate the fair value of a buyout price. In some situations, this will be the end of the price negotiations. In other cases, this number will simply represent your opening offer.
5. Clarify the Terms of Your Buy and Sell Agreement
The buyout agreement (also called a buy/sell agreement) will set out all the transaction terms. In most transactions, you and your partner will have separate legal representation, and your business attorney will work with your partner's business attorney to draft a partnership buyout agreement.
During the drafting process, issues always arise. If you're only buying out one partner, you can usually adjust the terms to address any concerns. When your deal involves multiple partners, you might end up with an enormously complex contract as you negotiate with each partner and add or adjust the partnership buyout terms. Once you finalize the contract, you can begin to work on raising the money you need to complete the transaction.
6. Review Financing Options
You have several options for raising the money needed for the buyout:
- Negotiate with your partner to pay in installments (referred to as owner/partner financing)
- Take out a bank loan
- Use your personal funds
- Sell part of your company to investors or take on new owners
Each of these options has benefits and drawbacks. If your partner is willing to take installment payments, this will allow you to acquire their ownership share without taking on debt or new partners. But this option is not always available.
Using your personal funds commits you to the purchase, but it also ensures that you do not take on any additional financing liabilities.
Bank loans take time. A bank will expect significant revenue and assets to make the business decision to fund your transaction. Furthermore, you will, of course, need to repay the bank.
Finally, selling off part of your company to new owners might put you back in the same position you are trying to change.
7. Finalize the Buyout
Once you pay your partner the money you agreed upon, you will have sole ownership of the company. However, this does not necessarily end your relationship with your ex-partner. You will still need to make sure your ex-partner meets their agreed-upon responsibilities, which may include:
- Conveying any property
If your ex-partner does not meet their obligations, you must decide whether to file a lawsuit.
Possible Benefits of Buying Out a Business Partner
After you finish your transaction, you can see many benefits, including:
- Greater ownership;
- A larger share of the revenue and profits;
- Fewer decision-makers;
- More independence.
If you still have partners remaining after the transaction, you may still have other voices in the room when you make decisions. However, you will have your original share and your newly acquired share when taking votes.
When the transaction leaves you as the sole owner, you will have sole decision-making power. You will also not need to share the revenue and profits with anyone else. At this point, you have the freedom to take the business in any direction you want. Of course, you also bear sole responsibility if your direction does not work out.
Potential Drawbacks When You Buy Out a Business Partner
Buying out a business partner also has drawbacks, such as:
- No one to share the work of running the business;
- No way to spread the risk of recessions and economic slowdowns;
- No co-owners to contribute ideas.
The most significant drawback to sole ownership is the financial ramifications. The cost of buying out a partner is high, after all. If you have only one co-owner, you will probably pay at least 50% of the value of the business. Sometimes, you can secure loans to pay the purchase price, but this isn't always possible.
Having a skilled business attorney can help you find ways to raise capital to pay the purchase price. An attorney can guide you to the right decision and even structure the purchase transaction to help you carry out your plan.
Are There Any Alternatives to Partner Buyouts?
Sometimes, you can't acquire your partner's ownership share. Maybe you couldn't agree on a price, or perhaps you were unable to raise the necessary money. In these cases, your attorney may present you with alternative strategies, such as:
- Changing the division of labor;
- Adjusting the profit-sharing;
- Redefining the management structure;
- Dissolving the company.
Keep in mind that with the possible exception of a judicial dissolution, these options require agreement. If the relations among the partners have completely broken down, judicial dissolution might be your only option.
Contact an Experienced Corporate Attorney to Get Legal Help for Your Business Today!
Buying out a partner can become a complicated transaction. But an experienced business lawyer can help find ways to satisfy all the parties and put the business in a position to move in a new direction.
The attorneys at Sequoia Legal have decades of experience helping businesses of every size through their legal issues. When you entrust your partnership buyout to our firm, you will have knowledgeable and creative advisors managing your transaction. Contact us to discuss your situation and learn how we can help.