The Right Way to Buy out a Business Partner: Dos and Don'ts

  • April 21, 2022

Around 7% 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 partner. It’s a complex task that involves putting a price on your company, negotiating a settlement with your partner, securing financing to buy them out, 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. 

How Do You Value a Company for a Partner Buyout

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 want to walk away from the company.  

Conduct an Annual Valuation

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 chose to liquidate it. Conducting an annual valuation helps to create an agreed-upon baseline during future buyout negotiations.

Negotiated Settlement

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.

Partner Agreements and Arbitration

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.

How To Buy Out a Business Partner: Do’s and Don’ts

No matter your partner’s reasons for leaving the business, whether it’s simply to move onto another venture or because the relationship is irreparably broken, there are some basic tenets that hold true for any buyout.

Keep Negotiations Civil

This is first and foremost a business agreement, while there are a lot of emotions tied up in 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.

Don’t Go It Alone

Partner buyouts are complex and you’re probably not equipped to navigate its technical and legal aspects. Even if you’re ending your partnership on great terms, the relationship could sour if either side feels they’re getting swindled. An acquisition attorney will provide valuable insight and help you check the necessary boxes throughout a buyout.

Secure Financing Early

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.

Don’t Forget the Paperwork

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.

Consider Liquidating the Business

There are dozens of potential hangups 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.

Financing the Buyout of a Business Partner With AVANA 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.