Business partnerships end for a number of reasons. Some are friendly and in the best interest of both parties – while others reach a bitter, nasty end. Even the COVID-19 pandemic and related lockdown has forced directors to evaluate their interests and involvement.
Whatever the reason for the break-up of a partnership, if you want to keep your business, but your partner has to go, we’ve listed four considerations for successfully buying out your business associate.
Agree on the terms and get expert assistance
When you began your venture, hopefully you and your business partner drafted a strategy as part of your founding documents that outlines how you’ll run the business, share decisions and divide responsibilities. A well-written partnership agreement or shareholders agreement should also include an exit strategy and rules for such exit.
You can think of your dissolution strategy as an antenuptial contract for your business partnership. It provides a clear exit strategy so that you’re not stuck negotiating how to part ways in the midst of hard feelings.
If you and your business partner(s) have been operating without a partnership agreement, speak with an attorney before moving forward with buyout negotiations. And even if your relationship with your partner is amicable it is in everyone’s best interest to involve an experienced legal advisor to formalise your buyout.
Get an official business valuation
To determine a fair price for your partnership buyout, and in ensuring that buying out your business partner is a good long term investment, it is important to know exactly how much your business is worth. You can do this by asking your legal advisor or accounting professional to perform a due diligence to help determine the value.
Whenever a director or shareholder in a small company wants to leave, it is usually preferable for their shares to be sold to the company or the remaining shareholders who will continue running the business. Once a price has been agreed, you can consider whether the company will buy back or purchase the shares, or whether the remaining shareholders should buy them?
In practical terms, private company share sales to remaining shareholders are simpler to administer than a company share buyback, but there may be tax benefits in structuring the deal as a company buyback.
See the buyout as a pivot strategy
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Read the full article by Gerhard Truter, Director & CEO CorpFin SA, as well as a host of other topical management articles written by professionals, consultants and academics in the October/November 2020 edition of BusinessBrief.
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