HOW TO BUY OUT A PARTNER
Updated: May 17, 2022
Partnerships are tough, even among really good, well-meaning people. Expectations are not met, life deals all of us different hands and things sometimes are headed to an unhealthy place. So how do I buy out my partner?
If you are fortunate, this discussion happens before it becomes ugly, like a messy divorce. Even in situations that are still amicable, the best solution comes via an existing buy-sell agreement or terms inside the Operating or Partnership Agreement that spell out how to handle this. Unfortunately, this does not always happen and, even when it does, it is not updated when the business has changed over the years. Contributions of each partner to the success of the business differ and so does their perception of value drivers.
Here are some key factors to consider:
The value of a business is not as scientific as some would like to tell you. It is a negotiation. The pain of continuing the partnership is a key contributing factor as well as the damage that can be caused by a disgruntled partner.
A minority interest in a partnership has a discounted value because it generally lacks control. Buying out a majority partner generally only gets a discount when there is a threat to start a competitor. Threats of control like these are not productive but they are informative.
Getting an independent advisor in the room not just as a mediator but as someone willing to ask hard questions and call BS on the pettiness that becomes normal is super important and mitigates the damage that can be caused. The goal should go from “getting the better of the other partner” to “what is in the best interest of all the stakeholders.”
Buying someone out often requires financing. This can cost working capital and hurt financial ratios necessary for other financial needs. It can be structured differently so that it does not hamstring the company. There are also very important tax consequences to structure so consult your tax advisor.