A strong partnership is great for business. Unfortunately, sometimes splitting up is the best decision business partners can make. When partners have incompatible visions for the future of their business, moving forward can be difficult.
A buyout allows one partner to cash out on their contributions to the company while giving the other partners complete control. Though often the best decision for a company, buyouts can be complicated. Before moving forward, you must understand the steps involved in buying out a business partner.
Consult a Business Attorney
Buyouts have many complicated legal and tax implications. Their complex nature makes an early consultation with a business attorney essential. A business lawyer can explain how to buy out a business partner in intricate detail. There are many legal, tax, and accounting implications that a buyout will have on you and your business.
Further, getting an attorney involved early will help the attorney understand what you want from the buyout and craft a buyout agreement accordingly. A lawyer can also help you determine the best way to approach your partner about the potential buyout. How you talk to your business partner about the buyout can make or break the deal.
Figure Out Your Goals
It is crucial to figure out exactly why you want to buy out your business partner. Sometimes it is clear the partnership is just not working out as intended. Other times the reasons are more nuanced and even amicable.
Understanding your goals from the beginning can help facilitate the buyout process regardless of the reasons. Focusing on what each party has to gain rather than going over every grievance can ease the buyout for both sides. Clearly articulating your motives and goals can also help when you approach your business partner.
Have a Discussion with Your Business Partners
A candid discussion with your business partners is one of the most critical junctures in the buyout process. It can also be a very challenging conversation.
Try to explain your decision calmly and directly. Even if the business relationships are already tense, avoid the temptation to be hostile or accusatory. The quicker everyone agrees, the better the buyout will go. Unnecessarily heightened emotions will only get in the way.
It can also be helpful to keep a record of the conversation. A record will help you identify points of agreement and disagreement later.
Research the Value of Your Partner’s Stake
To reach a fair buyout agreement, you must understand your partner’s stake in the business. Hiring an independent expert will provide you with credible information that you can use as a basis for negotiations. Ultimately you and the buyout target will have to agree on the value of their stake.
Understand the Tax Implications of a Buyout
Buying out a business partner has significant tax implications. A complete understanding of how your taxes will be affected by the buyout will help you minimize the overall tax burden of the deal. It is also a practical bargaining point during the buyout negotiations.
Figure Out How to Fund the Buyout
Though a self-funded buyout is ideal, most companies can’t afford to pay for the buyout outright with cash on hand. It is critical to figure out your financing options early. Buyout negotiations take time, dedication, and money. It would be a waste to get to the end, have everything sorted out, and then find out you cannot finance the deal. Standard buyout financing options include bank loans, equity funding, and buying out the partner over time with installment payments.
Create an Air-Tight Buyout Contract
An airtight buyout contract will save you from the pain and expense of disagreements in the future. A good buyout agreement must finalize the deal and clearly define every party’s rights and obligations.
The buyout agreement must follow any steps outlined in the original partnership agreement. It should also clearly state who gets what and how the business will move forward. You should ensure the buyout target can not take business clients with them. Discussing future competition and setting clear guidelines in the contract is also essential. You should also have clauses governing trademark and intellectual property rights.
Finalize the Buyout
Once you have reached an agreement with the buyout target and ironed out a buyout contract, it is time to finalize the deal. Every party will have to sign and file all the necessary documents. After that, you will have to ensure that every aspect of the agreement is being followed by everyone involved.
BrewerLong Can Help
If you need to know more about how to buy out your business partner, BrewerLong can help. Our experienced attorneys give every client the close personal attention they deserve. We can provide clear and practical guidance throughout the entire buyout process. And our team has extensive experience helping small and medium-sized businesses succeed as they move on to the next step in their development. Contact BrewerLong today. We will focus on the law so you can focus on running your business.
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