Buying out A Partner (and Avoiding A Messy Relationship in the Future)

Buying out A Partner (and Avoiding A Messy Relationship in the Future)

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Businesses fail for a variety of reasons and many times the reason for failure had nothing at all to do with the market, the products, lack of capital, a bad location, nor any of the other “major” reasons for failure, but many times the reason for failure was due to the bad dynamics between the owners themselves.

Let’s face it, people change.

You meet them one day and they are a smart, intelligent, competent, responsible, respectful, and ambitious person—just the type of person (you think) that you would like to form a partnership with to build an enterprise. But for reasons beyond your control, this partner changes down the line into a sneaky, lying, con-artist that’s sucking money out of the business and about to cost you the time, energy, and investment you’ve put into the business.

So how do you get out of this situation? How do you buy-out a current bad partner, and avoid signing on with another bad partner in the future? Here are some ideas.

Determine If A Buy-Out Is Needed (Hire An Attorney)

Before you do anything, make sure you have the proper legal representation working on your situation because your Attorney can determine if a buy-out might be in your best interest.

The cost of an attorney of this nature might cost you a couple thousand dollars, but they would be well worth the investment if they can make sure everything is sorted, organized, and efficient in relation to the buy-out procedure (again, if a buy-out is even the best option). Your attorney can review partnership agreements, ensure compliance with state/local laws, and more.

For example, if you have a good partnership agreement drafted, you might be able to dissolve the partnership without a buy-out, or you might be able to change the weight of ownership within the partnership agreement giving you more control without having to buy-out the other partner’s equity.

If Going Forward With The Buy-Out

If you are indeed going forward with a buy-out, here are some procedures you want completed:

  • File all paperwork and transfer accounts: All paperwork needs to be filed properly and the other partner’s name needs to be removed from your business accounts. More likely than not, this would mean that you might have to establish new business accounts in which the other partner doesn’t have access to said account numbers, passwords, etc. Your hired Attorney and CPA/Accountant should be able to assist with this process.

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  • Complete an efficient business valuation: In addition to hiring an Attorney and bringing in a CPA/Accountant, you also want to hire an Independent Consulting Firm to provide a business valuation which will give you the full value of the business (including the worth of your brand). This will help you decide if buying out your business partner is a good investment or not.
  • If needed, seek the right funding: This can include a variety of sources, such as your personal savings or debt financing options such as a business loan, line of credit, or business credit card. Before you spend your time searching for financing, check your personal and business credit scores with a free Nav account—our financing marketplace uses your business and credit data to match you to financing offers you’re more likely to qualify for.

Protect Yourself In The Future

If you are going to bring on a prospective business partner again in the future, you should approach the situation as if you are entering a marriage and structuring a pre-nup.

While similar to a marriage, your prospective business partner might inform you of how they “don’t believe in a break-up and would never leave you”, and while they might have every intention of never leaving you, sometimes disagreements about how to conduct business can unfortunately lead to a disastrous business partnership.

Before you bring on any prospective business partner, make sure you hire an attorney to draft up your Partnership Agreement to outline investments, responsibilities, and a dissolution process that provides an outlined exit strategy that everyone agrees to upfront. This allows you to negotiate the exit strategy at the beginning while everyone has good feelings towards each other, rather than at the end.

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About the Author — John Tucker has over ten years of professional experience in Commercial Finance and Business Development. Tucker is also an M.B.A. graduate and holder of three bachelor's degrees in Accounting, Business Management, and Journalism. To connect with John Tucker, feel free to send him a connection invite via LinkedIn at: www.linkedin.com/in/johntucker99

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