How to Buy Out a Business Partner

A successful buyout may require professional support from experienced advisors. This can include lawyers who help draft legal documents, accountants who review financial records, and consultants who understand how best to structure a deal that benefits all stakeholders involved in the process.

• Starting conversations—Attorneys can skillfully initiate and facilitate conversations with your business partner, potentially making the discussions more professional and constructive.
• Assessing tax implications—Your accountant may be able to assess the tax implications of the buyout, helping you structure the deal in a tax-efficient manner.
• Exploring buyout financing options—A lender or financial consultant can advise you on various buyout options, such as business loans or other types of financing, and help you choose the most appropriate one for your situation.
• Involving other professionals—There can be value in bringing in other professionals too, like a business advisor. Their expertise can ensure a well-rounded approach to the buyout process.

One of the critical aspects of a business partner buyout is determining the fair value of your partner’s stake in the business. This is where an impartial third-party valuation becomes essential.

To calculate the fair market value, a professional appraiser may consider various factors, such as the company’s financials (i.e., assets and liabilities) and market conditions.

Here are a few factors that go into calculating a valuation:

• Projected revenue growth
• Forecasted margin growth
• Shareholder cash returns
• Debt-to-equity ratio changes
• Economic conditions in the industry
• Geographic market volatility

Calculating the appropriate partnership buyout price requires close evaluation. An experienced third-party company can help you navigate the process step by step.

A buy-sell agreement is a crucial document in the partnership buyout process, particularly for businesses with multiple owners. It’s designed to provide both parties clarity and protection as they approach the transition in business ownership.

Here’s what you should review from your buy-sell agreement:

• Valuation clause—The agreement will outline whether the value of a partner’s business interest is calculated using a fixed price or formula or should be based on an independent appraisal at the time of the buyout.
• Payment terms—Refer to instructions on how and when the payment should be made per the agreement. Options may include a lump sum, installment payments, or a combination of both.
• Contingencies—Stay aware of any conditions that must be met for the buyout to proceed. This could involve securing external financing or obtaining regulatory approvals.
• Rights and obligations—Understand the rights and obligations of both parties during and after the buyout process.

A financial professional is the best resource to advise on available financing options. Some of the most common financing options used to buy out a business partner include:

• Business loans—A business acquisition loan may provide the necessary capital to purchase the stake of the departing partner and provide you with the flexibility to pay back the loan over an extended period. Compared to bank loans, BHG Financial offers large loan amounts, extended terms¹, and the support of a dedicated team to guide you through the process.
• Self-funding—If you have enough cash flow in your business or personal accounts, you may be able to self-fund a business partner buyout. However, the sum of money required is often too large for most to pay in a lump sum and could put your savings and business at risk.
• SBA 7(a) loans—You may be able to get the funding you need for a partner buyout with the help of the Small Business Administration (SBA). But compared to the rigid requirements that come with SBA 7(a) loans, online lenders like BHG Financial provide funding with minimal paperwork and no personal collateral required.
• Partner financing plans—Another option is to set up a financing plan with your partner where they receive payments over time rather than one lump sum payment at closing.

With careful planning and patience, it’s possible to navigate a mutually beneficial situation where all involved parties can come away with their desired outcome. Once an agreement has been reached between the parties involved in a buyout, it is essential to transfer any legal documents and accounts associated with the business. This includes transferring ownership of any assets or intellectual property, bank accounts, and other financial records.