Partner buyouts occur when one or more owners offer a partner a share of profits or cash in exchange for their interest in the business. A purchase clause in the initial agreement can streamline the process. Accurate research on the company’s net worth and financing options is important, and hiring independent attorneys or mediators can avoid bias.
Partner buyout occurs when more than one owner partner in a business decides to offer a partner a share of the profits or cash in exchange for all or part of their interest in the business. There are many reasons a partner buyout can occur, including diverging interests or business ideas, unsatisfactory performance, or a simple desire for sole ownership. Depending on the attitudes and level of preparation of the participants, buying a partner can be a simple and seamless way to end a partnership, or a nightmare of legal fights and posturing.
Just as couples planning to get married often sign a prenuptial agreement in the event of divorce, many companies put a partner purchase clause as part of their initial business agreement. Creating a purchase clause allows partners to determine under what circumstances a purchase may occur and how it will be structured. While no flourishing partnership likes to think of a day when interests can be separated, creating this type of agreement can streamline the entire process if necessary. Having a clear and legal buyout clause can even help ex-partners remain friends while dividing business interests.
If a partner purchase is on the table, both remaining and potentially existing partners should do specific research. It is important to have an accurate idea of the company’s net worth, as this can determine the appropriate amount to offer the outgoing partner. Net worth is determined by adding the sum total of earnings, hard assets such as property or equipment, and other assets such as proprietary products, and then subtracting any debt or financial obligations. In some cases, the remaining partner will offer the target partner a sum slightly higher than his interest in the business, as an incentive to accept the purchase.
The partner or partners who plan to buy must also determine how to finance the purchase. If a partner’s share of the business reaches a large sum, such as $1 million US dollars (USD), it is unlikely that the company simply has that kind of money in liquid form. A company trying to buy a partner may need a loan, or a business advance against profits, to close the deal. Financing the purchase from outside sources can prevent any sudden damage to the company’s profit margin.
Any discussion about a purchase is likely to quickly require the intervention, or at least the assistance, of lawyers. While hiring an attorney may seem like an aggressive or hostile move, it can actually be a way to take the pressure of direct negotiation off of the major parties. It is important that each party retain their own attorney, rather than rely on an in-house attorney. Hiring independent attorneys or an outside mediator can avoid any accusations of bias in the process.
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