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3 important considerations when buying out a business partner

On Behalf of | Aug 25, 2023 | Business Law

The financial and time commitments involved in building a business from the ground up can deter many would-be entrepreneurs from developing potentially groundbreaking business models because they don’t want to risk their financial stability or undermine the progress they have made in developing their careers. Taking on a partner can help to spread that demand across multiple people, allowing both partners to minimize their financial commitments and/or to continue working outside jobs.

Unfortunately, some people may eventually come to regret their decision to partner with a specific individual. Buying out a partner can give entrepreneurs sole control over the business they started, but they need to approach this transition very carefully. The three considerations below are of the utmost importance for those aspiring to and an existing partnership while retaining their ownership interest in their business.

What does the contract say?

Partnership agreements often impose very specific expectations on both partners. From how much they will financially contribute to how much they will receive during a buyout, there can be many important details in that initial agreement that will influence the buyout process. Reviewing the contract before discussing the matter with a partner can help someone avoid mistakes and oversights that can damage their working relationship and undermine their likelihood of a successful buyout offer.

What is the business worth?

To buy someone out successfully, it is typically necessary to make a reasonable offer based on the current value of the organization and its future prospects. Simply looking at the amount currently invested in the company isn’t usually adequate for the purpose of establishing its true fair market value. Performing a thorough and accurate business valuation will be an important part of the buyout process.

What support does the remaining partner need?

All too often, people make buyout offers without really reflecting on what their partner provides for the company. They may need help learning to handle certain tasks or may need an introduction to key clients or vendors that have only worked with the partner leaving the organization. Ensuring that one partner will connect the other with the right people and provide them with appropriate training can be an important consideration when negotiating a buyout offer.

Employing a thoughtful approach when proposing a partner buyout may help someone minimize conflict and optimize their chances of success moving forward as a sole proprietor or a sole member of an LLC.