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3 Tips For Correctly Buying Out Your Business Partner

3 Tips For Correctly Buying Out Your Business Partner

When businesses start out as partnerships between two or more people, it is generally because there is a consensus, amongst those involved, about an eventual goal for the brand. Unfortunately, not everyone feels the same about that goal as time moves on. In some cases, business is slower than expected. For some business owners, this represents a sign to buckle down, work harder and learn from past mistakes.

For some of their partners, it means that it may be time reshuffle the deck, change the outlook or maybe even move on to other ventures. What to do when there is such a disconnection between business ideas? Sadly, this is where many business partnerships come to an end. It doesn’t mean, however, that the company must cease to exist. Often, it entails the buying out of one or more business partner.

But how does one go about this correctly? Here are three tips:

1. Make sure you adhere to the partnership agreement. Just because you have experienced a falling out with your business partner, it doesn’t mean that it’s time to instil new rules. If you are the partner who is seeking sole ownership of the business, it’s important to remember that you can’t call the shots yourself just yet. In other words, be sure to stick to the original agreement as set out by you and your partner at the point of the company’s inception.

“Many partnerships are established with a written partnership agreement,” explains Jeff Clements on Chron.com, “Partnership agreements often cover managerial control issues, non-compete agreements, and contingencies related to exiting the partnership, via an incorporated buy-sell agreement. If the partnership does have a buy-sell agreement, it should have a formula for determining the sale price of each partnership interest, as well as a pre-agreed structure for financing such a transaction.”

2. Seek the assistance of a third party arbitrator. In some instances, soon-to-be former business partners can’t exactly settle on an agreed-upon amount of the buyout. Quite often, a business will have significantly grown its worth from the time it began to the time when one of the partners wishes to part ways. So what is the correct amount of money due to the departing party? Sometimes, an independent professional valuation opinion is necessary.

“Although partners may know the underlying business very well, deciding on a fair valuation is a complicated matter,” says Clements, “Beyond the technical financial valuation methods that require expert analysis, there is also the issue of subjectivity clouding judgment when dealing with intimate matters such as a partnership. To make a deal work, both sides should obtain professional advice regarding the valuation and structure of a transaction of this magnitude.”

3. Clarify the company’s financing capabilities. It’s important not to confuse your company’s worth with its ability to finance a buyout. In many cases, business owners need to finance their buyout because they wouldn’t be able to run their companies after paying out hefty lump sums. On BusinessInsider.com, Chris Risey writes that your ability to pay what your partner wants can only be achieved if the ongoing operations of your brand can afford it.

“For example, if two partners each own 50% of a $20 million company, one partner can buyout the other one if the financing can support $10 million,” offers Risey, “If the company can only support $8 million of financing, the seller needs to lower his price or retain a portion (in this case 20%) for a buyout or payout later, as financing capabilities increase.”

At Synergy Merchants, we’re well aware that small to medium sized business owners in Canada aren’t generally working with such high numbers. This is where our unique merchant cash advance program comes in so handy. In many cases, our clients decide to use the money we provide them to buy out their former business partners.

For more information on our merchant cash advance program or to speak with one of our licensed funding specialists to get a free, no obligation quote, simply call Synergy Merchants at 1-877-718-2026 or email us at info@synergymerchants.com.

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