Associates, friends and investors with complementary skill sets often start a business together. Over the years, the priorities of the business and business partners evolve to be reprioritized. A business partner priorities may stem from several situations; a partner’s retirement, a disagreement, a new business opportunity, reduction in time involvement in the business due to personal reasons etc.
Conflicting priorities and interests of business owners generally lead to a break-up of the business partnership. The break-up is a challenging affair due to the long working history between the partners. It becomes tougher should there be a breakdown in communication between the business partners.
Partners should ensure that they emerge from the situation having the best interest of the business and their individual financial interests looked after. The following six steps will help keep the best interest of the business and business partners intact.
In this article, we also explore the importance of corporate partnership valuation in Toronto.
Step 1: Have a clearly documented Buy-Sell Agreement
Any business venture should have a clearly documented foundation. In this case, we’re referring to a solid partnership agreement that details how the business is to be carried out, how managerial responsibilities are to be delegated, who takes the overriding financial decisions as well as how a potential dissolution is to be approached.
A definitive dissolution strategy should be documented by an experienced attorney for all partners to have a clear cut agreement in place. The agreement documented will ensure that there are no unpleasant surprises and conflicts at the time of business partners parting ways.
Now it is still possible to buy out a partner if you don’t happen to have a pre-written agreement on hand. It’s just that the situation gets messier than it needs to be. Even if a dissolution is not yet on the horizon, consult with an attorney as soon as you can if you don’t already have an agreement to turn to.
Step 2: Start the Conversation on a Light Note
With a dissolution strategy laid out, all partners’ interests are now safeguarded. It’s time to talk to your partners cordially – as friends! After all, partners are people that you’ve spent a considerable amount of time with, painstakingly building a business together from the ground up. Sentiments will eventually enter the conversation and shouldn’t be diluted with legalese.
The buyout conversation should be approached in a positive manner even if you and your partners aren’t on the best of terms. If they get their back up, it will just lead to a financially draining and prolonged break up – something that all can do without.
Focus on a clear path ahead rather than dwelling on why the partnership didn’t work out or revisiting past issues. When on amicable footing, it’s now time to commence the buyout as per the instructions detailed in your strategy.
Step 3: Manage Pricing Expectations
Partners should agree on and hire an outside valuator, or get separate business valuations that will need to be reconciled later on. This figure will not only help you understand how you stack up against your competitors, but will also give you and your partner a great starting point to begin negotiations.
You have to ascertain whether or not your buyout is a viable investment in the long run. An independent valuator will consider all relevant factors and arrive at your business’s fair value.
Even if you and your partners already agree on the business’ value, an outside valuation will protect the partners in the event that any exiting partner alleges that they did not receive fair value.
Based on the valuation figure, you can also get a great idea of what decisions to take in order to boost the business’s long-term equity value.
Step 4: Review Financing Options
You’ll need the funds to buyout a partner. Most partnerships find themselves relying on independent means for this purpose. If you’re looking to get approved for a small business loan, you need to convince the lender that your business is in a position to draw in sufficient future profits to pay back the loan in due time.
Most lenders shy away from loaning funds for a buyout, just because a buyout in itself doesn’t inject new funds into the company or financially benefit it in any way. If you’re seeking funds from investors, it could be equally tricky given that equity-based funding also needs to see some substantial financial benefit being made for the company.
If under-funded, the buyout may not proceed at all, leaving you and your partner at an impasse.
Step 5: Agree on the Buyout Purchase Price
Don’t perform your valuation in-house, lest it be rife with errors stemming from taking incorrect or inadequate information into consideration when preparing the valuation report. It’s best to approach an independent third party valuator who has extensive knowledge in the industry in which you work.
If either of the partners disagree with the external valuation you receive, you can hire another valuation expert to provide a Critique Report or provide a Fairness Opinion on the valuation performed.
Step 6: Document the Closing of the Partner’s exit
You will need a legal attorney to do all the required paperwork and transfer accounts to the new business partners, ensuring that the exiting partner’s name is entirely removed from legal ownership and from all accounts. There are many important documents at this stage that release the departing partner from liability claims against the company so it’s important to have this handled very well.
If you’re dealing with a partnership/business dissolution or even if it’s smooth sailing for now, it is never too early to get an independent business valuation done. Contact us to understand how we can assist you.