Business partners, whether they are old friends, family members or simply two people who went into business together, are bound to split at some point. There’s just no guarantee that the partnership will last. When one partner leaves, the whole balance of the business is thrown off. And if there’s a lot of tension or unresolved issues between the two, there is a risk that the whole company will collapse. In most cases, if you are the remaining partner, you should try to get full ownership of the business. This usually means making an offer to buy out the other partner, working out a fair deal between the two of you.
A buyout doesn’t necessarily end badly. Sometimes, both partners recognize that it’s time for things to change and agree that it’s best for them to split up. And if things are done right, the buyout process can go pretty smoothly. But when money is involved and feelings are hurt on both sides, the end result may not always be so peaceful. If the partnership bought a building or office space together, the buyout may become quite complicated.
Of course, coming up with the cash to buy out your partner is easier said than done. A buyout can cost a lot of money and it’s often up to you to pay for it. If the buyout drags on, or it’s looking like it might fall through altogether, the business itself can suffer, sometimes a lot. That is why many owners who are looking to buyout their partners decide to finance the transaction. Not just to make sure that the deal actually gets done, but also to avoid additional aggravation. Financing the buyout upfront can save both partners a lot of headaches.
Stay Professional
No matter how much tension, history or how troubled things become between you and your partner, you don’t ever want to burn bridges. If one partner wants out of the deal, it’s up to both of you to work together.
If your partnership agreement specifies an amount or buyout formula, use that. If not, keep a friendly dialogue and work out a deal in which you both give up something. A hostile partner can derail a deal. If your partner wants to fight or makes it known that they won’t agree to the offer, you might have a problem. If this happens, the buyout may not only cost you more money, it may not happen altogether. Stay professional. Things will go much more smoothly if you always stay calm, levelheaded and cool.
Ask Someone for Help
Having the right help is very important in a buyout. If you aren’t sure how to do it or where to start, ask someone for help.
Before proceeding with a buyout, make sure you have an independent, up-to-date valuation of the business. This way both partners will have some idea on what the value of the business really is. A valuation can also uncover liabilities you may not be aware of. A professional valuation can help you and your partner plan how to handle any debt after the buyout, and give you the option to structure a loan to also take care of new equipment or remodeling. This knowledge can go a long way toward keeping things on a fairly even keel.
A business lawyer should be hired, even if the buyout is friendly and you and your partner are friends or even family. Each state has its own specific rules for a buyout and a business lawyer will know them. A surprise legal problem or road block you are unaware of can happen during a buyout. It can bring the whole thing to a grinding halt. Be sure to select one who works with business buyouts regularly. Also, both sides should agree on the choice of lawyer. And then, be sure to actually follow their advice.
In a friendly buyout, the lawyer’s main job is usually to make sure that the paperwork is submitted correctly and on time and to address any open terms. If a partner starts giving you trouble, an attorney is likely better equipped to handle it. If you purchased a building or a piece of real estate together, consider engaging the services of a local real estate lawyer. The buyout has to not only account for the partner’s share of the business, but also of the building or real estate.
Pay for the Buyout
The buyout should be completed as fast as possible. The more drawn out and the longer it takes, the higher the chance things will not go well. Ideally, you would pay for the buyout from cash reserves, but most of the time it just doesn’t work out that way. Paying over time is possible, but the more the payback term is prolonged, the greater the chance the person you are buying out will be unhappy about it and feel like they aren’t being treated fairly.
If you pay a partner in installments, they are essentially extending you a loan, which will often carry interest for a set period. Depending on the terms, they may be able to stay in the business and retain influence over your operations until they are paid off.
Paying someone out over a long period isn’t usually a good option when the partners don’t get along very well. Most business owners either use equity financing or debt financing instead. Each has its own drawbacks, and both have advantages.
Equity financing means selling off your partner’s shares to outside investors. You could be replacing one partner with one or more other partners, which may not work out to full control over the business for you.
Using debt financing, you’re taking on more loans and more debt. However, it does mean the business is fully in your hands, and it works for any buyout, so that’s an option too. It is not always an easy or quick option.
The 7(a) loan is a type of loan through the U.S. Small Business Administration. It is used by some business owners. However, qualifying can be tough. In addition to having strong business financials, you’ll need a detailed plan showing how the business can remain profitable after the buyout. Applying is fairly fast, but approval can take months. All that time, your partner could be waiting for their buyout.
If you get turned down by the SBA, your next stop may be a bank. But most bankers are very wary of buyouts. They fear the additional debt, and the lost stability of the partner. And you’re likely to run into the same objections you got from the SBA.
There is one more route if the business operates from a building owned by the partners. Likewise, relatives sometimes can co-own or inherit property and want to use it differently. You can refinance the property to cover the cost of the buyout.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
