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Around 8% of U.S. businesses are operated as partnerships and around 70% of those partnerships end in a buyout or liquidation. With those kinds of statistics, small business owners will want to prepare themselves for the possibility of buying out their partners. It’s a complex task that involves putting a price on your company, negotiating a settlement with your partner, securing partner buyout financing, and completing all the necessary paperwork to legally separate them from the business.
This guide will answer the question “How to buy out a business partner?” and describe how the remaining partner can finance the buyout with the help of AVANA Capital.
Determining the worth of your company is perhaps the most challenging aspect of buying out a partner. You and your partner can make reasonable guesses as to what it’d be worth if you were to sell the business together, but it’s impossible to know the true value without putting it up for sale.
As it serves their self-interests, the exiting partner will often believe the business is worth more than it really is. Business partners can avoid these discussions by installing some safeguards long before either of you wants to walk away from the company.
Coming up with an exact value for your business isn’t possible without putting it up for sale, but keeping solid financial records will make buyouts easier. Start by establishing how much cash the business has on hand, how much it brings in each year, and the assets that could be sold if you and your partners choose to liquidate it. Conducting an annual valuation helps to create an agreed-upon baseline during future buyout negotiations.
Some common financial valuation methods include assigning a certain earning multiple, discounted cash flow or DCF method, or book value/net asset valuation method.
Even if you have a baseline value for the business, there’s bound to be some back and forth during the buyout. Maybe your business is on the cusp of some record profits or a recent turn in the economy results in your partner’s equity being valued much lower than it would have been just a year ago. Negotiations are usually tense, so you must have solid numbers from the annual valuation to fall back on.
If partners are unable to agree on a buyout settlement, you might need to fall back on legal agreements. Many partnerships have agreements in place that set the price for a buyout. Buy-sell provisions in a partnership contract are usually tied to the annual valuation, but can also involve hiring a third party to get a more accurate assessment. Often, partnership agreements are bound by arbitration clauses that state all parties must agree to the valuation determined by third-party experts.
Your partner may leave the business to pursue a new venture. They might also leave due to a broken relationship. In any case, some basic principles always apply to a buyout.
This is first and foremost a business agreement. While a lot of emotions must have gone into building a company together you don’t want negotiations to get personal. If they do, everyone will become more entrenched in their positions and you’ll need a third party to break the stalemate, which is more costly to both sides.
Navigating the complexities of a partner buyout requires technical and legal expertise that many people lack. Even when ending a partnership on positive terms, misunderstandings or imbalances in the deal could lead to a strained relationship if one side feels shortchanged. An acquisition attorney will provide valuable insight and help you check the necessary boxes throughout a buyout.
A valuation expert or accountant can help accurately assess the business’s value, avoiding disputes over the buyout price. Using a fair, unbiased valuation method, like earnings multiples or discounted cash flow (DCF), can help make the valuation process smoother and support a fair price for both parties.
The most challenging aspect of buying out your business partner is coming up with enough money. Lenders are reluctant to finance a buyout as it’s unlikely to result in any additional revenue for the company. There are options, like an SBA 504 or 7(a) loan, paying out your partner over a period of time, or selling your partner’s share in the company to investors. In any case, securing financing should be your top priority. You can find more information on various types of SBA loans and also a comparison between SBA 504 vs 7(a) loans.
Business partnerships are a web of bank accounts, government forms, and contracts. Removing a partner’s interest from all of these entities is no easy task, but rushing through the paperwork can cause profound harm to you or your partner down the road with audits, lawsuits, and fines. This is why you should always enlist the help of a business acquisition attorney when conducting a partner buyout.
There are dozens of potential hang-ups when buying out a partner, from securing financing to agreeing on a valuation and the whole thing may become untenable. Your best option could be liquidating the business and starting over again without your partner. This way you can both extract the maximum value from the company and hopefully start separate successful business ventures with the resulting capital.
Figuring out how to buy out a business partner in a small business is complicated, but by far the most difficult aspect of it is securing enough money. That’s where AVANA Capital comes in –– our SBA 504 loans are a great option for taking control of your business without having too much of your own money down. Our fixed-rate loans have some of the lowest interest rates in the industry, with flexible repayment plans designed to help your business grow.
Contact one of our representatives to learn more about our SBA 504 loans and how we can finance your seamless partner buyout. Our experienced team wants to help make your partner buyout as smooth as possible. Secure financing today from AVANA Capital.
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