June 16, 2022
According to most studies, it’s common for business partnerships to only last between three and five years, with the average being four years. Those that successfully make it past that point often have long-tenured, thriving businesses. After years of collaboration, business partners can drift apart. One reason for this could be life stages – where one partner is ready to retire and the other wants to keep working. The decision to buy out a business partner can be triggered for a myriad of reasons, but whatever the reason, there are a few best practices we recommend in order to develop mutually agreeable terms and to preserve the relationship.
Before doing anything, pull out those old Formation Articles, Operating Agreements, and other relevant documents and review them for Buyout Clauses. You may be surprised that there’s likely a framework for handling this event mentioned in them somewhere. Since they are your legal agreements, they’ll be a factor in how an amicable parting of ways is processed.
It’s tempting at this point to slack on the job or show up less, but getting ‘senioritis’ and checking out early is a sure way to introduce a point of aggravation into the process. Remain committed to the success of the business until the very end – regardless of the circumstances. Continuing to perform with integrity is how you’ll be remembered by employees, customers, vendors, and others and is key for a successful exit event.
Now it’s time to sit down with your business partner and thoughtfully tell him or her that you think the best path forward is for one of you to depart. Take the high road, keep the process friendly and fair, and decide if collectively you’d rather sell the business to a third-party or if one of you should buy the other out.
Since you are the initiator, you have already given this more thought or more careful study than your partner. Be prepared and clearly understand your position so that you can articulate your version of a fair plan for your partner to consider – make it fair to yourself, your partner, your employees, your customers, your vendors, and all those affected. Most importantly, allow your partner some time to digest the information.
Once the conversation is underway, you’ll need to hire a valuation firm to determine the equity value of 100% of the business. If one of you is a minority shareholder, have an experienced valuation professional articulate the concept of the “Discount for Lack of Control.” Buying a partner out is not unlike the process of selling a business. See our article "How to Successfully Sell Your Business." Having a reputable third-party opinion of value is important. We don’t suggest using your CPA because this isn’t their area of expertise.
To fund the event, consider all forms of financing in order to help the acquiring partner structure a deal that works for both parties. SBA, Private Equity, New Partners, Owner Financing, and Personal Funds are all viable options that should be considered.
Once you have a solid valuation, an understanding of who wants what, an idea of the obstacles to success, hire an experienced M&A attorney to help negotiate a ‘close-able’ framework and to draft the buy/sell agreement.
Sometimes the termination of a partnership is unavoidable, but it doesn’t mean it must be combative. Following these steps ensures the most equitable, fair, and amicable partnership separation possible.
If any of this resonates with you, we encourage you to take our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).
Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.