What Are The First Steps to Take to Buy Out a Partner?
Preparation and planning are key to successful outcomes in any project, and buying out a partner can be a consuming, emotional, complicated process and so this question is really around planning and preparation.
The best thing that any partnership can do is put in a buy-sell agreement and ideally, put it in place before you need it. But let's assume for the sake of this question that you don't have one because many don't. Most of the partnerships that I talk with are partners that are trying to buy out their partner and there is no buy-sell agreement in place. That's part of the reason why we're in this conversation, so if you don't have one, get one.
Then from there, I think the first step I'd say is to communicate. Talk to your partner and make sure you're on the same page. I get phone calls from guys that want to buy out their partner and the first question I ask them is “Have you talked to your partner?”, and most of the time the answer is “no”. So if that's the case you kind of have to go back to step one and make sure that you're on the same page with your partner, because if you head down the path not having had that communication or those conversations, you're setting yourself up for a really long, difficult, complicated process.
Understand What the Business is Worth
The second would be to understand what the business is worth. If you have buy-sell mechanics that’s great and that's super helpful. If you don't, you probably need to start talking to and maybe hire a professional evaluation firm. Maybe talk to potential buyers just to get a sense of what the business is worth so that when the time comes to buy out your partner you know what you have to do to finance it.
How Will You Finance the Buyout?
The third step is to start to think about how you are going to finance the buyout. We've talked about borrowing from a bank, borrowing from your partner in the form of a seller note, potentially an earn-out, finding a new partner, somebody with capital to help recapitalize the business etc. There are other considerations when pursuing a process like this. I think those would be the top three: one is to communicate, have the conversation and make sure you're on the same page, understand what the business is worth, and then figure out how you're going to finance the eventual buyout.
Written by Paul Wormley | General Partner, Hadley Capital
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