I know — easier said than done. The truth is when you buy out your business partner out of the company you both helped build, sentiments will get tense for obvious reasons. Who knows — maybe both of you have a lot of stake in the company. So what do you do then? How do you approach this prospect? And why?
Recognize reprioritization to buy out your business partner
What does that mean?
Over time, a business can evolve; that’s what that means. It means often priorities will shift as the business grows. Sometimes it may involve a partner’s retirement and limited capacity to focus on said business. Perhaps even your business partner may have another opportunity or agenda that would take up more of his or her time.
Unfortunately, it might even involve some sort of business disagreement. That would be the worst-case scenario.
Even so, there are factors to help lead a business buy-out toward amicable results. But here’s the most important thing to remember when going into something like this:
Both partners should approach this solely thinking about the best interest FOR THE BUSINESS. PERIOD.
That being said, if you can manage that mindset with your business partner, the rest of this should be easy peasy. Starting with:
#1: Establish the buy-sell agreement right from the get-go
Get it all…. in WRITING.
What we mean by that is set up that documentation even before you launch the business from the ground up. Making it very clear on how not only managerial responsibilities should be delegated and what happens if there may be a buy-out one day easily can soothe the troubles of feeling like you’re being “booted out” of the company.
At the end of the day, though, your business partner isn’t necessarily being “booted out.” But if this is done poorly, it will certainly feel that way.
So how do you not manage this buy-sell agreement poorly? It’s a great strategy perhaps to have an experienced attorney review any documentation you set up with your business partner. Just to be clear you dotted all the i’s and crossed all the t’s.
#2: If the prospect gets raised, DON’T say it’s “just business”
We’re friends…. RIGHT?
Well, it is simply “business” on the surface for obvious reasons, but when it’s solely between you and your business partner, take serious note of this:
It’s just a “conversation.” Between friends, even.
Because let’s face it: if you’ve built a business endeavor with your partner, chances are you and him/her are also friends.
So talk about the possibility of a buy-out as friends. Start it off on a light note. No need to get legalese about it. Be positive about it instead. In fact, there’s great reason for both parties to be positive about it. And here’s why:
#3: Set up the pricing expectations ahead of time
Money, money, moneeeey…. MONEY.
Like, put it in the damn buy-sell agreement documentation. That’s firm and concrete in both your and your business partner’s minds from the very beginning, so both of you know what to expect in the event of a buy-out.
Even better: don’t do a valuation in-house. Get an impartial third-party completely removed from the business to do it for you. That way, you sort of don’t have any choice but to agree on it. If you both agree on what a price would be, that already sets both parties up for being amicable — as the concession then is, well, you’re “leaving the company,” but you also get a nice, big, fat check in the process.
That’s, in fact, why it’s called a “buy-out.”
Sure, your partner might not care much for the money, because there’s a lot of love for the business, but setting up a discussion as to why it’s probably best for the business certainly softens the blow and gives some nice cushion for the one being bought out.
#4: Make sure you have financing in place
Do you have…. the CASH?
That should be a no-brainer as you can’t successfully negotiate a buy-out without some cold, hard cash to offer right off the bat. Often this isn’t coordinated ahead of time; so when the conversation does come up, and you just don’t happen to have the “offer” ready to go “yet,” that’s not going to look good on you.
So get a loan. Simple as that.
You’ll obviously have to convince any lender that your business can manage to draw enough profit to pay it back, though, but that doesn’t take much to look at your financials for an accurate picture. Just, more importantly, ensure the funds will be there before ever having that conversation with your business partner.
#6: Definitely document the closing of your business partner’s exit
It’s not “good-bye.” It’s “see you later.”
This is critical for a lot of reasons, but probably the most important one for your business partner to know about is when dealing with anything like a lawsuit or other liability claims. At the end of the day, a business buy-out might even look much more like a silver lining for the one exiting solely based on this.
It means that with the help of an attorney filing all the proper paperwork and account transfers to completely remove the exiting partner’s name off all legal ownership, bad things happening to the business won’t adversely affect that partner whatsoever. Because the partner no longer shares ownership of the company.
That being said….
You then overall have the best possible chance at keeping things copacetic
You won’t, thankfully — as a result — be viewed as an evil overlord if you keep these factors in mind.
Of course, it’s also a possibility…. That you might be the one exiting! If that’s the case, though…. Review what you just read here! Repeatedly. And remind yourself: I’m fine, everything’s fine, I don’t need to be salty.
And, best of all, I have this big, fat check to enjoy.
