A successful business partnership relies on each partner’s commitment toward achieving a common goal. Over time, however, priorities may change, and viewpoints may diverge. For example, one partner wants to expand; the other is averse to risk. Retirement, outside business opportunities and family changes are additional reasons why a partnership buyout may make sense. Following are five things to consider before buying out a business partner.
1. Is There a Partnership Agreement?
A written partnership agreement often spells out how issues such as non-compete and buy-sell arrangements will be handled in a partnership buyout. Buy-sell agreements usually include a pre-determined formula for calculating the sale price of each partnership share as well as the payment terms, including dependencies or contingencies, of the transaction.
2. What Is Your Financing Ability?
Because debt is typically used to finance a buyout, it is important to analyze how much debt the business can handle. If a company cannot sustain the financial commitment required for buying out a business partner, the selling partner either needs to reduce the asking price, retain part interest and sell it later or hold a seller note.
3. What Are the Legal and Tax Issues?
If there is no partnership agreement, the buyer should evaluate the buyout just like any other contract, taking into account legal and tax issues that may affect the value or viability of the deal. Capital gains tax, severance packages, pension or profit-sharing plans and personal assets are among the other legal and tax issues the buyer needs to explore.
4. How Will The Buyout Affect the Buisness’ Long-Term Viability?
One of the keys to a successful partnership is that each person brings different strengths to the partnership. One partner may be good at finances, the other at marketing. One may handle employee relations very well, the other skilled in constructing business deals. Before buying out a business partner, carefully evaluate who will handle the outgoing partner’s responsibilities. Will you assume them, distribute them among existing employees or hire other personnel? Also, take into account how the departure of the partner will affect relationships with suppliers, customers, creditors and investors.
5. Will the Buyout be Friendly?
Depending on the reason for the buyout, the process may be amicable, or it may turn ugly. In the event the process will be unpleasant, consider retaining separate legal and financial counsel. Company advisors may have divided loyalties or conflicts of interest which leave them unable to fairly represent the buyer.
When negotiating a successful partnership buyout, good counsel is essential. With our expertise and experience, the qualified professionals at Links Financial can provide trusted financial guidance and ensure a successful transaction that leaves everyone in a win-win situation. Learn more about our M&A services here.