Three Things To Remember When Buying Out A Business Partner

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What if we buy out our business partner?For some companies, their biggest roadblock to growth isn’t a lack of ideas, motivation or initiative. It is a business partner that has other priorities.  For companies with significant growth potential, this challenge arises frequently.

One owner wants to grow; the other wants to sell.  One owner sees potential and the other sees risk. Sometimes this comes from different perspectives, stages of life or generations like in family businesses (the younger generation wants to build wealth while wants to protect it).  Owners caught in this position can go through years of treading water, and it’s not until it is addressed that greater growth can occur.  

What if we buy out our business partner?

Coming up with just one story for this ‘what if’ is difficult. I have seen this play out numerous times. For growing companies, a great time to do a buyout is in combination with a larger growth or financing initiative. 

While this may seem counter-intuitive, exploring this ‘what if’ hinges on a few important insights:  

1) Try not to fight over valuation – Valuing a business is not an exact science and my experience is it’s difficult to ‘convince’ an owner of a value anyway. Getting a formal valuation from an independent valuation firm can help, but determining the ‘right’ price is often only a ‘battle’ while getting the opportunity to build greater future value is about “winning the war”.  In fact, I have seen buyers actually overpay to make a seller happy in order to ‘win the war’ and create greater equity value over time.  

2) Figure out the Company’s financing capabilities – Our clients typically do buyouts by financing with debt, so that as they pay the debt off, their equity value increases.  So rather than focus on valuation, focus on the financing capabilities of the company.  Your ability to pay what your partner wants realistically is only going to be achieved by being able to finance the buyout.  For example, if two partners each own 50% of a $20 million company, one partner can buyout the other one if the financing can support $10 million. If the company can only support $8 million of financing, the seller needs to lower his price or retain a portion (in this case 20%) for a buyout or payout later, as financing capabilities increase.
3) Nothing talks like cash – Whether they sell 100% or a portion of their ownership, selling owners get motivated when they get real cash upfront. This approach sure beats buyouts done with insurance products and a buyout/sell agreements.  Those deals are done to cover future estate taxes but the selling owner doesn’t get any cash until he dies!  How unexciting is that!  

While it may seem like short, simple advice, following this unconventional logic to successfully break up with a business partner can help owners Explore ‘what if’ and often remove their biggest obstacle to greater growth value (their business partner).

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