Nothing in this world lasts forever, which is undoubtedly true about business partnerships. Even in ideal partnerships, partners face health issues, family relocations, divorce, retirement, and, unfortunately, financial and personality conflict, potentially forcing partnership dissolution.
However, when one partner decides to retain control of the business and continue without their partner, they may want to identify ways to buy out a business partner. In this post, the Hunnicutt Law Group team will provide a step-by-step guide on how to buy out a business partner in Texas.
With the right strategy in place, buying your partner out of the business can effectively provide you with more control over your business. Read on to find out more.
Figuring Out What You Want from a Partnership Buyout in Texas
When you ask yourself, How do I buy out a business partner? you may be asking the wrong first question. The first question you may want to ask yourself is, Why is a buyout necessary?
Perhaps your partner is seriously ill, and you agree that buying them out of the business will benefit you both. Or perhaps your working relationship has become rife with conflict, and the only way to resolve the dispute is by buying out your partner.
If you have a partnership agreement, a LLC or a corporate operating agreement in place, this can be a tremendous help to you and your attorney to guide the buyout process.
Discussing Your Expectations with Your Business Partner
Even if your relationship has reached a seemingly insurmountable conflict, blindsiding your business partner with news of a buyout is unlikely to achieve your goals. How to buy a partner out of a business successfully is a process that begins with mutual respect and open communication.
Again, having a well-drafted agreement in place can help the buyout process go smoothly. But even if your relationship has broken down, a skilled business lawyer can help.
If your conversations with your partner do not go as planned, discuss them with your lawyer. Try to document discussions as best you can, including when you agree and when you do not, so you have this information to support your negotiations.
Valuing the Business
Hiring an independent valuation consultant can help you make a fair offer as part of how to buy out a business partner in Texas. Using an expert to assess your company and its financial health is an excellent way to get objective information about what your business is worth.
A valuation expert’s tools to value your company include reviewing your balance sheets, cash flow forecasts, and sales or revenue to determine your business’s fair market value. Often, a valuation consultant will consider other factors that can affect a company’s value but are not necessarily reflected on its balance sheet, like:
- The political climate and market conditions,
- Each business partner’s expertise and book of business or creative contributions, and
- Your business’s competition.
After your business has been valued, you and your lawyer can craft a deal to help you buy out your business partner.
Putting Together a Payment Structure
Again, having an agreement in place before a buyout is the most helpful tool a lawyer or entrepreneur can have in knowing how to buy out a business partner. Sometimes, an operating agreement will contain stipulations regarding buyouts. If this is the case, deciding on a defined deal structure is easier for all parties.
Partners can structure a buyout payment in a few ways. First, one partner can make a lump-sum payment to the bought-out partner. Another option is to pay by periodic, long-term payments. These payments can be structured as monthly, quarterly, or even annual payments.
The structure of financing often depends on the quality of the relationship between the parties. Suppose one partner is buying out the other due to health, relocation, or other issues unrelated to the desire to continue to work together. In that case, a structured payment may be readily accepted. In other cases, one party may demand up-front payment.
Not everyone has cash readily available to buy out their business partner. If that is the case for you, some options to fund your buyout include:
- Bank loans. Some small businesses may qualify for bank loans and may even be able to obtain lower interest rates. However, banks can be choosy and may not fund business buyouts.
- Family and friends. Sometimes, family and friends have the cash to lend you the money you need to cover any shortfall in your savings. However, this can be a risky investment for them, and you will want to have an attorney draft the necessary paperwork.
- Installments with interest. Even if the buyout is not entirely amicable, your partner may be amenable to an installment contract if the payments are made with interest and a contract specifies appropriate penalties for non-payment. Be sure to have an attorney draft or review any installment payment contract.
- Outside investors. If no other financing options are available, consider equity investors. If you use this option, remember you will still end up sharing control over your company—you are simply replacing your business partner with one or more equity investors.
Buying out a business partner in Texas is a big, risky move. When you feel ready to take the reigns of your own company, consulting with an experienced business lawyer is one of the best things you can do. Hunnicutt Law Group is here to help.
Finalizing the Terms of the Partnership Buyout Agreement
The terms of the buyout agreement should be forthcoming about the non-financial consequences as well as the financial ones. Being as straightforward as possible about each partner’s roles and responsibilities after the buyout will make the separation go as smoothly as possible.
Buyout agreements may also need to include non-compete agreements, non-solicitation agreements, and a discussion of the division and protection of intellectual property. A Texas business lawyer can help you decide what needs to be included in your final buyout agreement.
How Hunnicutt Law Can Help
The business law team at Hunnicutt Law Group has experience helping Texas small business owners. We have strategies to make buyouts as pain-free as possible and can help you transform your business. Contact us today to discuss your business needs. We are available through video conferencing, online, or by phone at 214-361-6740.