Business Partnerships
According to the Government of Canada, a partnership is a mutual relationship between two or more corporations or individuals who carry on a business together. Because each partner contributes their labor, skillsets, and money to an enterprise, they share in the losses or profits of a business. Such losses or gains are often divided amongst each partner.
Partnerships are usually bound together by a written agreement covering regulations for entering and leaving a partnership, as well as rules on how income is allocated. However, there will be times when a partner will want to leave due to a new business opportunity, a disagreement amongst other owners, the desire to retire, or for other personal reasons. Regardless of the motive, there are several things to consider when buying out business partners.
Buying Out Business Partners
To seamlessly and successfully buy out business partners, be sure to consider the following:
- Have a previous agreement clearly documented: Sign off on a buy-sell agreement as your initial business foundation. This record would detail business operations, delegations of managerial responsibilities, how financial decisions are made, and steps to take in case a dissolution occurs. Protocols should be set in place for when a partner wishes to depart from a business.
Often, family members and friends form businesses together and do not foresee any conflicts arising. Thus, they may not always create a business partnership agreement, but it is advisable to have one in place. A professional attorney should also document dissolution strategies so no unexpected surprises or conflicts develop if partners split ways.
- Discuss matters in a positive light: Even if a partner or partners are leaving on a sour note or due to an inevitable conflict, try to stay cordial and friendly. Remember how you started your business together as a team, with big dreams and hopes for success. Be reminiscent of how far you’ve come and all the challenges you’ve surmounted collectively. Spend some time reviewing how you’ve grown and made a positive impact on your clients and customers. Even if you and your partners are not ending in the best terms, prioritize not delaying the process or financially draining yourselves. Focus on the future and be meticulous with exit strategies.
- Determine a fair business valuation: Find out how much your business is worth to figure out a reasonable price for a partnership buyout and to ensure that it will be a beneficial long-term investment. Agree on hiring an outside valuator or look for multiple business valuations as a starting point for negotiations to proceed. Independent valuation firms usually take into consideration total expected profits in the anticipated future and then discount the projected future earnings for each year based on the rate of expected return. Nonetheless, other outside factors need to be noted to value your business beyond your income, assets, and liabilities. For instance, how strong is your partner’s network or specialization to your company’s success? What is the value of your brand, and how is your future growth potential? Closely consider how various aspects impact your business’ value without your partners.
- Plan for how you will replace your partners: How active is your business partner in running the company? Are they very hands-on and involved with the day-to-day operations? Will that lead to you spending more hours at work or hiring new employees? Will there be a substantial impact on sales, or will your growth be temporarily stunted? Determine how to keep your business operational during their absence.
- Assess financing options: Think of how you will fund buying out your business partners. Keep in mind that investors and financial institutions may not want to loan money or invest in your company if they believe you will be unable to pay back loans or make substantial profits.
Many partner buyouts utilize equity financing, which involves raising capital by selling a portion of or all of your partner’s interest and shares to private investors. In essence, you still do not receive complete ownership. With debt funding, you borrow money to expand your claim of ownership. If you and your partner separate on good terms, you can self-fund a partner buyout. This method has the departing partner serve as a lender to whom you pay over a period of time. Be sure to set clear terms about payment methods and time lengths if choosing this route. Another option would be to get a loan from outside lenders whose primary goal is to help small businesses. Be sure to check out their pricing structure, rates, and flexibility.
- Work alongside a professional acquisition’s attorney: Even if you are best friends or related to your partner, it is beneficial to hire an experienced outside attorney to negotiate the final buyout. All of the paperwork, terms, and agreements need to abide by local and state laws and honor the initial partnership document. Despite having to pay fees for an attorney, it can be well worth the price, so nothing becomes unclear or mishandled. Furthermore, be sure to document how accounts will be transferred to new business partners and double-check that the departing partners’ names are removed from all accounts. Sign all parting documents, as well as paperwork that releases the departing partners from any business liabilities.
Overall, to reach mutually agreeable solutions, be willing to stay amicable, and make the entire process smooth. Aim to have a win-win situation on all sides and stay civil enough to keep your business moving in the best direction possible.
FINAL THOUGHTS
Not all businesses keep their founders or partners for the long haul, but that does not mean parting ways has to be overly complicated or challenging. Your business can still flourish as long as you keep the process amicable, hire qualified professionals to determine fair business valuations, and carefully assess your financing options. Planning ahead and remaining diligent and flexible can go a long way.
To learn more about buying out your business partners, contact the experts at Hometown Life Insurance. Our licensed professionals will be happy to answer any questions you have.
