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Seven Things to Consider When Buying out a Partner

Posted by Zinner & Co. Tax Team on Oct 16, 2018 6:10:00 AM
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iStock-157674472_blogWith an increasing number of baby boomers reaching retirement age, business owners are choosing to leave the workforce. This means the end of a partnership and a change in the way you do business.

If your partner wants to leave the business, there are a few things you should consider:

  1. Figure out the terms – Hopefully, you thought through this possibility when you formed your business. If a clear exit strategy was formulated and articulated from the onset of your business, settling affairs should be simplified. If terms were not established from the beginning, determining what is "fair" can be a challenge.

    While your primary concern may be cash flow, your partner may be consumed with tax avoidance. Make sure you understand your partner's goals, because deferred payments can be a win-win.

  1. Establish a valuation – Determining a value for your business can be contentious. What is "fair" can be relative, and an expert in valuation may be required to help referee this battle.

    There are three approaches to valuation: Asset value, which as the name infers, looks at the value of all of the assets the company holds (also referred to as Net Book Value). A Net Cash Flow method, which uses a present value for anticipated revenues. Comparable Business Transactions, which compares a company to similar organizations that have been sold. It is important to remember that profitability and valuation may be reduced by the absence of your current partner.

  1. Maintain continuity – The loss of a partner can create a serious gap in your operational capabilities in the near-term. Develop a plan to acquire or develop needed skills.

    In addition to a loss of skills, you may also suffer from a loss of goodwill. If your partner owns key relationships with your clients/customers, they may leave if your partner is no longer a part of the equation.

    Many well-planned successions occur over a period of three to five years, to mitigate the risk of operational interruptions.

  1. Use a professional – An experienced accountant can be a huge help in negotiating a buyout. While you understand your business, you probably have not been through large numbers of these types of transactions like an accountant. The objectivity of an outside perspective can help you keep on track and help you avoid hidden pitfalls in the dissolution of a business relationship.

  1. Remain positive –There is a huge benefit to remaining on good terms with your partner. Being adversarial may cause unneeded and undue stress and may make your partner want to "play hardball" on principle. Understanding your partner's goals can help you to craft a mutually beneficial agreement.

  1. Success is in the details – While the devil may be in the details, so is success. Creating a thorough, workable exit plan for your partner can help you ensure that important details do not get missed. For example, if your partner requires a lump sum payment, determine if a loan or line of credit will be needed. For this reason, it is important to develop and maintain a long-term relationship with your bank or lending institution.

    Working through important factors such as organizational planning and cash flow projections can help you avoid difficulty moving forward.

  1. Communication is key – Prior to a settlement with your partner, you should begin developing a communication plan. Positioning the news as a positive development can go a long way to allay the fears of your clients and employees. Let them know you have a well-reasoned, cogent plan for operations going forward.

Buying out your partner doesn't have to be a painful experience. What started in friendship can end the same way, if you take a measured approach to settling affairs. As always, the team at Zinner & Co. is here to help you with planning and transition.

Topics: partnerships, business valuation, business succession, Business - Management, Issues & Concerns

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