Question

What Are Common Issues Encountered When Buying Out a Partner?

Answer
By Paul Wormley | Last updated: November 8, 2021


Small business owners are not experts at this process. Most small business owners only sell their business one time, so there's a level of concern and trepidation about pursuing a buyout of a partner when it's not something that you're an expert at. It's a broad question, there are lots of potential “gotchas” in a process like this. As I've said, I think preparation pays a lot of dividends but I kind of went with a “Top 10” list of the most common issues.

No Communication

Number one would be no communication between the partners. I get calls from business owners who say “I want to buy out my partner” and I ask “Have you talked to your partner about it?” and they say “no”. I think that, unfortunately, is probably the number one most common issue that I see when talking to business owners about wanting to buy out a partner.

No Plan In Place

The second is there's no plan in place, there's no buy-sell agreement, they haven't corralled their trusted advisors who will be critical to getting a transaction like this done and that kind of relates to the third one which is unrealistic time expectations.

Unrealistic Time Expectations

In most cases, the businesses these partners have were built over decades and you're not going to unwind that partnership in months. Typically when I'm talking to business owners that are seeking a buyout of their partner I say “Plan on a year, maybe more, if you're starting flat-footed”. It's not something that you can affect and do it correctly in months.

Emotion

The fourth would be there's lots of emotion in this and sometimes as business people, we're a little averse to admitting that we'd like to think that this is a quote or a business deal and it should be void of emotion. From my experience, that's not the case and this can range from relief on the part of the two partners that they found a way to meet everybody's needs, to full-blown conflict. It's a little bit akin to when a marriage is ending. Some divorces are easy and some are super messy and partnership buyouts can kind of have a similar look.

Confusion or Trepidation

The fifth would be, and I kind of referenced this earlier, some confusion or trepidation about “Where do we start?” or “How do we even begin to go down this path of separating a partnership?”, which could have been the partnership that's been in place for decades.

Know the Value of the Business

That relates, again, to valuation, which would be the sixth one “What's the business worth?”.

Financing

The seventh would be financing, “How do we fund the buyout?”.

Cost

The eighth would be cost. This is sort of eight and nine. It's going to take some money to do this right. Not a ton of money but in order to get it done correctly you need to plan on making an investment in your team, in your trusted group of advisors to help you affect it, and do it correctly.

Cost of Time and Distraction

Number nine would be cost in terms of time and distraction. Any time that you spend on a process like this is time that you're not spending operating your business and that distraction can be costly. This is, again, where preparation pays a lot of dividends in terms of working on a buyout.

Change Management In Transition

The last one, the tenth, would be the potential for change management in transition that partners aren't thinking about when you have an exiting partner. Most of the time that person was contributing to the business in a way that was important and meaningful and so when that person is no longer in the seat, how is the remaining partner going to fill their shoes? Thinking through that change management, that transition, is really important to have for the remaining partner. Having a successful path forward and to the extent that the buyout was funded either through an earn-out or through a seller note, for the exiting partner to be confident that the business is going to continue to perform and it's going to meet its obligations under that seller note or the earn-out. That change management issue is one that often gets kind of forgotten about or swept under the rug but it's a really important element to having a successful buyout.

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Sale Process Due Diligence Pre Sale Preparation Readiness Exit Planning Exit Strategy Expert Content Expert

Written by Paul Wormley | General Partner, Hadley Capital

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