When you first started your company, both you and your business partner were crucial to its success and longevity. Fast forward to today, your business partner has decided to transition away from the company. This could be for a number of reasons. More commonly, the partner wants to move on to a new venture or they are looking to retire. In some instances, however, they are either no longer aligned with your company’s vision or there has been a falling out of some kind.
Whatever the situation, you now have to take the right steps to ensure that when you buy out your business partner, it is not only favorable for all parties involved, but that the buyout will not negatively impact the company in any way. Partnership buyouts are expected to increase with more baby boomers planning their retirements and younger generations looking to make more lucrative career moves, so make sure you are prepared when the time comes.
Determining the value of each partner
Even if the buyout began on friendly terms, disputes about the process can quickly make the partnership buyout less civil. The easiest solution would be to follow the terms outlined in the buy-sell agreement that both parties settled on when initially forming the partnership, assuming it was drafted in a fair manner. This agreement typically speeds up the buyout process and ensures there are fewer arguments and risks along the way. In some cases, there is no initial buy-sell agreement, which means that each partner will need to agree on the value of each other’s shares in the business. If one partner has been more involved in the company’s operations and growth, a higher payout could be expected.
It can get complicated if each partner establishes a valuation without professional knowledge or expertise and tries to buyout the other partner using the average of undervalued or overvalued numbers. Either the numbers will be vastly different, or both partners might not agree on a final number. This is why it is important to work with a third-party valuation company such as Appraisal Economics. We have an unbiased approach to every valuation we conduct, and the methodologies we use to determine value are fair and credible.
Getting back to business
When a partnership buyout can be settled quickly and with no animosity, it allows you to get back to business as usual. Knowing that the departing partner has received a fair share of the business, he or she is more likely to do what is necessary to ensure that business operations continue to run as harmoniously as possible during this transition phase. Contacting clients and updating them about the partner who is leaving prepares them for any upcoming changes. Detailing the responsibilities of the partner helps to decide what tasks you will take over and what potential staffing decisions you need to make to avoid any discrepancies in operations and performance.
The process of buying out a partner is faster and more preferable when you use a certified business valuation specialist. Keep this in mind as you consider forming another business partnership in the future. Initially establishing a buy-sell agreement with a new partner and a third-party valuation company will prove better for everyone in the long-term.