Businesses rarely stay the same over time, and the people that own and run them are likely to change too. Business partnership agreements end for a wide variety of reasons. Perhaps you and your partner have different goals, or they want to take advantage of a new opportunity. But if you want to carry on the business, you are going to need to take control via either a partnership buyout or acquisition.
There are many steps to a partner or shareholder buyout, and potential risks along the way. Read on to get an overview of the main things to consider. For the purposes of this article, a ‘business partner’ is considered to be a co-director of your company or a major shareholder in it. It doesn’t refer to a partner in a partnership structure, where the following processes don’t apply as there are no shares to buy.
Why buy out your business partner?
The most usual reason for buying out a fellow director is that your business partner no longer has the same interest in or passion for the business that you do. They may disagree on the direction of travel, or be less motivated, or simply bored of the work and keen to try something else. Diverging views doesn’t necessarily mean that one of you must leave, but if you’ve been pulling in opposite directions for some time, you may want to have the discussion about whether you should part ways.
This parting need not be acrimonious – in fact most buyouts are mutually agreed, a win-win. The director with the most passion for the business gets a controlling interest, while the other gets to cash in the fruits of their hard work over the years, and either move on to a new venture or take early retirement.
Things might get fractious only if each of you feels equally passionate about the business, but for different reasons, and each wants to buy out the other. In this situation it may help to bring in an impartial third party, such as a consultant, who can try to find a middle way to satisfy both parties.
What are the benefits of buying out a business partner?
If you have spent a lot of time and energy building a company with co-directors, simply ending the relationship (for whatever reason) may not be an option. Your business is likely to be your livelihood and is probably theirs too. Buying out your co-director is a way to end the agreement that allows you to keep the business going. In fact, you will be in sole control and will benefit more from your contracts and profitable activity.
Put simply, buying out your business partner will transfer their share to yours – so you may become the sole shareholder. You can set the direction, make changes to services or products and generally run your daily operations the way you want. This streamlined leadership and decision-making structure has the potential to make your business more agile.
Are there any potential drawbacks?
The process of trying to secure a buyout of your business partner may make your life more complicated too. Firstly, it has the potential to affect your personal relationship with your co-director. You need to approach the topic carefully because any disagreements at this stage are likely to cause further issues down the line.
You also need to be prepared to take on additional liability for the performance and financial health of the business. Depending on the kind of company you run and the type of business insurance you have, you will now be solely responsible for the business’ debt and liabilities, including costs related to compliance, expenses and third party contracts. If this sounds too risky, you could just look to dissolve the company and go your separate ways.
So, how do you actually go about buying out your fellow shareholder(s)? Here are the key steps you need to take.
Obtain a business valuation
You need to make sure that you get an accurate business valuation as a first step. This will ensure that you can set a fair price for your partnership buyout and that all parties are on the same page from the outset. It will also help you see whether taking sole ownership of the company is a good long-term investment.
It is important to make sure that you enlist an independent valuation firm to perform a formal business evaluation. They will value all of your expected profits for the foreseeable future, before discounting these future profits by the returns they expect.
This company valuation could also affect the deal you reach with your partner. Their leaving may lower your future cash flows, for example, which would in turn lower the valuation.
Employ an experienced buyout solicitor
Most people will only go through the buyout or acquisition process once in their lives. An experienced buyout solicitor, on the other hand, will have likely helped hundreds of people through the process successfully. They will have seen it all, from the most amicable buyouts to the most contentious.
Apart from their experience, there are a couple of other benefits to hiring a buyout solicitor. Firstly, they can negotiate the terms of the partnership buyout on your behalf. Even if you have a great personal relationship with your partner, it is in everyone’s interest to keep proceedings as formal as possible. Secondly, they will make sure that you tick every compliance box and ensure all the relevant rules are followed.
Consider different buyout financing options
You may have the assets to buy your fellow director(s) out without needing any additional sources of funding. If this is not the case, you will need to look at your options for financing your partnership buyout. Your accountant will be able to work with you to suggest the right strategy.
If your business has a good operating history of being profitable, you may be able to secure a small business loan. However, lenders tend to avoid providing loans for servicing buyouts, because the money will not actually be benefitting the business and may in fact lead to diminished cash flow. There are an increasing number of alternative lenders emerging who specialise in this kind of funding though.
Equity-based funding can also be hard to obtain, for this same reason. It’s difficult for investors to expect a strong return when their investment is funding a company buyout. Your business partner may be open to alternatives, such as creating a long-term payment plan rather than buying them out in one go.
Negotiate the deal terms
Having your buyout solicitor on hand to lead the negotiations can be beneficial, because there could be a lot of detail and technical considerations to iron out. Firstly, you need to make sure the financial obligations of each party are clearly laid out. Make sure that you have in writing exactly how much is being paid and when, as any uncertainty over this can quickly cause delays and disagreements. Secondly, make sure that all matters relating to liability are dealt with before your co-director’s departure. They are not going to want to have any more financial obligations when it comes to lenders, mortgage providers, suppliers or clients.
A common issue that many company buyouts must also deal with is intellectual property. If your business partner claims to have come up with an important idea or product, they may want to keep the rights to it when they leave the company. On the other hand, if the intellectual property is a valuable asset, you may need to keep it. For this reason, you should ensure that valuable assets (including IP) are listed on the balance sheet as company assets, and are not the property of individual directors.
Another potential stumbling block is the network of business relationships your co-director has built up over the years. Without that individual in the business, some clients may no longer want to renew their contracts or initiate new projects. The transition needs to be managed very carefully, so take the time to go over all the details during the negotiations.
Reach an agreement and set out the structure
Your solicitor will make sure that the way your agreement is structured meets all the relevant legal requirements and has the best chance of preventing any future disputes from bubbling up. An example of this is inserting a non-compete agreement. This contract commits both parties to not entering into direct commercial competition with each other once the deal has been finalised.
Once everyone is satisfied with the agreement, it is time to sign it. This makes the agreement official, and means you are very close to successfully completing your partnership buyout.
Transfer the funds and business
The final step is to make sure all the loose ends are tied up, starting with the big one: the money. Your accountant will make sure that the departing director receives their money and that all of the financial accounts are transferred over to your name. From there, it is a case of changing the locks, updating your company information and website, and getting on with running the business.
Is a shareholder buyout the right option for me?
It is important to explore all options before committing to a buyout. Make sure to talk with your accountant, as well as your partner, about what your goals are and how you see the future of the business. There may be another way of allowing your partner to step away.
What are the alternatives to partner buyouts?
There are a number of other ways you could go about reducing your business partner’s involvement and influence the business without having to buy them out:
- You can agree to change the terms of the partnership agreement so that you take the majority share in decisions, finances and liabilities
- You can agree to dissolve the partnership agreement, split your assets and both go your separate ways (this may be the best option if the valuation comes back lower than you had hoped)
Talk to your accountant to find out the best route for you.
If you found this article helpful, you might also find our article on director's loans and how they work informative, too!