Buying out a Business Partner

If you're planning to takeover a business, our must-read guide outlines essential considerations to make, pros and cons and what moves to make to best position yourself for a smooth transaction

Updated 4 June 2021

Buying out a business partner is likely to be an unfamiliar process. There are thousands of questions, and it may the first time you've looked at working out the valuation of your business. How you proceed, what terms you agree and how you finance your purchase will depend on your business, the industry you work in and your turnover and profits. Whatever happens, we strongly suggest seeking advice from a lawyer and/or accountant to avoid any roadblocks.

To help give you some ideas of what's important, our guide covers:

Warning: This guide is general and does not constitute financial advice. Do not make an offer or sign an agreement to purchase without discussing your situation with a lawyer or accountant. Too often, people rush to exit or buy out a business partner,, resulting in legal issues. Very few such instances make it into the media, but our research team has heard from several lawyers who confirm business exits can be costly when rushed. We believe the best way to proceed is to carefully consider both you and your business partner's interests.

10 Must-Know Facts and Considerations When Buying out a Business Partner

Buying out a business partner is a careful process where personality, emotion and money all need to be managed. Our considerations below are for guidance only; you'll need to taillor your approach to your business, industry, shareholder(s) and stakeholders. We suggest talking to your accountant and/or lawyer for guidance on the buyout process.

Tread lightly

Whether the split up is amicable, mutual, or forced, tread lightly when approaching your partner about buying him/her out. If there are hard feelings, your partner could be defensive from the start. This will detract from making progress.

Try starting with the positives and work your way into the legal stuff later. Hammering your partner with a bunch of legal documents, numbers and even threats will only make things worse. Feel him/her out first – you never know when your partner may be on the same page and ready to part ways. If they are, you'll be able to proceed with confidence.

Talk to your partner yourself

Unless you're on really bad terms, approach your partner yourself rather than sending in an unbiased third party. There's plenty of time later for lawyers, accountants, and other professionals to get involved.

For now, keep it between you and your partner. See how much you can work out one-on-one. Your partner will feel less defensive this way, and you'll both be able to think clearer. Once you bring in the 'big guns' it's like you're asking for a fight, and no one wants that. It's expensive and weakens your business.

Don't focus on the valuation

You'll need a business valuation (more on that below), but it's not the most important factor. If you get hung up on the valuation and ignore the other stuff, like your business partner's connections and experience, you could be forgetting a big piece of the puzzle.

Know This: What will your partner do when you go your separate ways? If your agreement doesn't preclude either of you from starting your own business in the same industry, you could be facing a fierce competitor who intimately knows your business, which is a big upper hand and puts your current business at risk. A restraint of trade clause may be too much of a deterrent to move a sale forward.

Instead, focus on the aftermath. What will each of you do – how will you split the resources the business accumulated through the years? You need to work out a business buyout like a divorce - both parties need to be equally compensated for things to move forward. If there's a feeling of inequality by either party, the process will likely stall.

Get a business valuation

You can't buy out your business partner unless you know what the business is worth. You may think you know its valuation, but getting an independent valuation is key. What if it's worth more than you thought? It could also be worthless. Knowing the exact valuation gives you numbers to work with when presenting your partner with an offer.

A business valuation tells you not only how much the business is worth now, but it also projects future profits to help you create the most attractive offer to buy your partner out.

Enlist the help of professionals

Once you work out the details with your partner, it's time to bring in the professionals. You'll need help from many people to make the buyout work, including:

Accountant – Your accountant can help you work out the details, including filing your tax returns appropriately and handling the money. Your accountant will oversee your tax issues and ensure you have the funds needed to orchestrate the buyout.
Banker – Your banker will help you learn your financing options to buy your partner out. It's great if you already have a relationship with a banker.
Lawyer – Your lawyer ensures everything is handled legally and your interests are protected. A lawyer can also draw up the buyout agreement and make sure it's executed properly.

Consider your financing options

Most business partners don't have the cash handy to pay their partners off. Instead, you may need financing. You may be eligible for small business loans, or you can work out an arrangement with your partner in one of these ways:

Buyout arrangement – You pay your partner over a specific term, typically monthly, until you're paid up.
Earnout arrangement – Your partner stays tied to the business without actively working it and earns some of the profits along the way until he/she is paid up, then you officially split ways.
Lump-sum buyout – You pay your partner the entire amount in one lump sum either from your own investments/earnings or the proceeds of a loan.

What works best will come down to your cashflows, priorities and preferences. It will, in almost all cases, take some lengthy discussion. If you need guidance, an accountant is a good starting point.

Keep the terms clear

Even though it's an emotional process to split up with your partner, you must make sure all details are clear. Never assume anything and run everything past your lawyer. No matter how close you were to your partner or how good you feel about the 'break up', don't make any changes. Make sure you cover every detail and ensure both partners are on the same page.

Look at other options

If you can't afford a buyout, consider your other options, including:

Dissolving the partnership – Depending on your initial agreement, you may be able to dissolve the partnership without buying your partner out. Go back to your original agreement to see what terms you set.
Change ownership weight – If your partner lost interest in the business, consider changing the weight, so you take majority ownership. Your partner doesn't have to be active in the business but also doesn't need his/her equity bought out because he/she can still earn from the business.

File all necessary paperwork

Make sure all paperwork is filed with the approximate authorities. Just because you and your partner split ways and make it 'official,' it needs to be on record too. Otherwise, your partner may still have ownership in the business even though you technically bought him/her out. Use professional lawyers and accountants to make sure all paperwork is completed.

Transfer all accounts into your name

Don't overlook any accounts you held together. Bank accounts, credit cards, investment accounts, and vendor accounts all need to be switched into your name only. You'll need the official paperwork showing that you're the sole owner for most of the switching, so get your paperwork in order and don't overlook any accounts.

The Pros and Cons and Buying Out a Business Partner

Like any business decision, there are pros and cons to buying out your business partner that you should consider.

Pros

You earn the profits and don't have to split them with anyone
You're the sole decision-maker for the business
You don't have to worry about anyone else making poor decisions and ruining the business
You can do with the business as you please, even if you want to expand, narrow it down, or hire employees

Cons

All risk and decisions are on your shoulders
You must cover all costs yourself
It's expensive to buy out a partner, and sometimes it leaves you with long-term debt as you pay him/her off

Frequently Asked Questions

Every business is unique so it's likely the questions you have will go beyond the common concerns we list below. In such instances, we strongly suggest taking professional legal and/or accountancy advice.

How much should you ask to buy out a business partner?

Once you know the business's valuation, you can multiply that amount by the percentage of ownership. For example, if you owned 50% of the business, that means you must pay your business partner 50% of the business value if you want to buy him/her out.

What should you do if your business partner wants to buy you out?

If the roles are reversed, and your business partner wants to buy you out, use the same steps. Do your due diligence, think about the best arrangement, and know the business's value. If it's in your best interest to get bought out, make sure you're getting a fair share of the business's equity and use a lawyer to ensure everything is done right.

Can I get a loan to buy out a business partner?

If you qualify for financing, you can use the proceeds to buy out your business partner. The key is qualifying for financing. If you have good credit and a low debt-to-income ratio, you may be in a good position to do so. If not, you may need to tap into your personal assets, such as topping off your home loan to pay your partner off.

What happens when one business partner wants out?

If you have multiple partners and one wants out, it doesn't dissolve the partnership. If you had the agreement set up the right way, there would be an arrangement made on how you shift ownership of the company and/or buy out the partner who wants out. If not, work together to determine the best way to buy out the partner and restructure the ownership.

How do I get rid of a bad business partner?

It happens to the best of us. Even when things start great, you can have a business partner that goes wrong. While it's not a pleasant situation, you should get out to prevent any further issues. If your partner won't be bought out, your next best bet is to sell the business to another party (or your partner) or close the business altogether.

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