It’s not really hard to sell a business to a partner although it can be tricky and complicated if not handled right. Allowing a partner to completely own the business is arguably one of the commonest ways of transferring ownership and nothing new.
In most cases, people like to sell their businesses of many years to individuals who understand its value and where it could go and exactly what needs to be done once you leave the management or operations.
Essentially, releasing a business is usually relatively easy and capable of being effortlessly processed legally. This doesn’t mean the partners are always on the same wavelength, lack disagreements and differences. In most cases, a partner who wants to purchase looks to ease the takeover and quicken the process of getting the other partner out of the business fast and as unproblematic as possible.
Considering the way the partnership comes to an end could happen again in the future, the partners usually foster respect and acquiescent attitudes that diffuse any anxiety and bad blood usually way before. They all know they could be in the same position in future to sell or receive a business and thus ensure the process is well defined and the transactions very clear.
Preparing the groundwork with a Buy-Sell Agreement
When it comes to any partnership the Buy-Sell Agreement comes to the fore. It’s the document entered by the partners that easily defines the entire process of selling to a partner. Actually, legal firms are always crafting such agreements all the time and come in handy beyond taking over a business from a partner.
The details on buy-sell agreements may differ but an established partnership enters into one covering diverse issues such as exit strategy, induced or not, disability, divorce and even death. All these situations could affect the business in a huge way; usually defined way early in the beginning with the terms clearly demarcated.
While it has diverse purposes, the main reason for the agreement is to clearly indicate what will happen and procedure to be followed way before any predefined event like death, exit or disability ever happened. The transition, terms to be entered, cost and ownership transfer are well known way before the partnership has taken root.
In essence, the buy-sell agreement is so significant and binding that it protects either partner from misusing the other in case an event happened or a partner is forced by circumstances to transfer ownership.
The agreement allow the parties involved to understand what is at stake and that all have an equal footing or as agreed so that they can concentrate on adding value to the business. No matter how things pan out, they know clearly well what would happen if any issue ever came up.
When the time has come for any of the partners to make an exit and transfer ownership the agreement ensures that chances of disagreement or lawsuits are highly minimized.
Essentially, a buy-sell agreement helps clarify a number of things including:
- Value of the business: Ensure the agreement indicates the process of valuing the business and that it’s clearly defined and agreed upon every 12 to 24 months for instance. It should also be recorded openly. However, in case the partners cannot easily come to an agreement about the business value an appraising expert can be consulted for valuation purposes after an agreed period such as one year.
- Sets the terms: In most cases, the terms are founded upon a note where interest might be agreed to be disbursed over a given timeframe such as 5-10 years. The terms can be elaborate and different from one partnership to the other but the important thing is that both partners agree. For instance, some of the terms might to be to the effect that the buying partner has to seek funding to offset a specified percentage of the buying price and complete the remaining amount through a note or other means. As such, the exiting partner will have sufficient amount of money to come up with another stream of income and prepare accordingly for life after the remainder of the funds have been released.
- Refusal right: Even in a partnership either of the partners can seek complete ownership or sell to a different party. However, the agreement can include a "first refusal right" for any of them in case one of them wants out. It means none of them can seek another taker to release their share of the business to before offering the other partner the opportunity. It may not be great to have to wait for the other partner to refuse or agree especially if there’s a third party willing to do it fast, but it protects both partners.
- Collateral/security agreement: In essence, it’s important to have a clause in the agreement protecting both partners in case the buying partner defaults. The provision can clearly indicate what would happen if there was any default or lateness in releasing remaining payments. For instance, the pledge could include a provision for the buying partner to purchase collateral/security recoverable in case of any default. Of course, a business can run effectively well without buy-sell agreement of any kind. However, were any of the partners to opt out and seek to leave or sell to the other lack of clear terms and guidelines to instruct the process could be debilitating. The important thing is to have such an agreement ready and preserved immediately the partnership kicks in to prepare accordingly in case of any eventuality.
Issues That Could Come Up While Selling To a Partner
Harmonious transfer of ownership to a partner does occur but problems could also transpire. The deadlock can be caused by so many things.
While both partners could be in agreement about a possible exit of one partner, stubbornness on various issues could forestall the process. Even with a buy-sell agreement, a partner might still cause problems by indicating the amount valued and offer on the table is either to low or want the terms re-looked. Obstinacy comes in when the partner seemingly has a different valuation of the business and terms and wants things changed or trimmed in their favor.
Zero agreement in place
If both partners started the business without having in place a buy-sell agreement of any kind, it often doesn’t go too well. It means there’s no way either of the partners could use the provisions of the agreement to trigger an ownership takeover of any kind or release their share to a third party. In essence, an agreement foresees and prepares for the realities of life that could happen any time and affect the business, its ownership, operations and survival, such as death, disability, irresponsibility or divorce, among others. One partner might want to acquire the other person’s stake only to face problems since there may not be prior guidelines and rules set to effect the process. A partner might also refuse to come to the table in such a scenario and decide to just hang on even if it means bringing the business to the ground.
Unresolved matters/unwritten goodwill
Some businesses were started and run by the goodwill of the partners based on their trust and friendship with zero rules, agreements or guidelines written down and agreed upon. However, even with the best relationships and friendships, deadlocks have always cropped up when it comes to selling the business. This has also affected family owned businesses that everyone would expect to run and exchange hands without a hitch, even if the partnership has been ongoing for decades. Essentially, relationships can remain really healthy and great until it comes to selling the business or selling an equal share to a partner.
Related: How to Sell a Family Owned Business
In essence, for those yet to start any investment with a friend or family, the early phases are arguably the most critical, particularly because you’ve no doubt you may have to sell the business in future and one of you might want complete ownership.
What About Selling Without the Consent of a Partner?
From the beginning, a partnership is run largely by lots of commitment, understanding and sufficient trust. Everyone works hand in the interest of the business to make sure it grows exceptionally. However, when one partner decides they want to leave and sell their share of the company differences could result.
When a partner want to sell without consent, is this possible? Can the person just do it? It depends on a number of issues.
- Jurisdiction: In essence, where the business is located plays a key role in the decision of a partner to sell. Where the company has been registered is important. For example, in some countries and states in the United States, a mere partner who has a 50 percent stake in the business could wake up one day and dissolve it under the law. In other jurisdictions, selling without consent or dissolving a company or other decisions require a majority interest in a business. Even so, where a company is equally owned no partner, with or without sell-buy agreement can wake up one day and decide to sell without seeking the consent of the other partner.
- Court mandated dissolution: At times, fallouts between partners can be so acrimonious that they find it hard to come into any agreement when one of them wants to sell and leave the company. If no agreement seems forthcoming, a partner can go to court where the business could be involuntarily dissolved legally; the partnership and company ends and every asset put on the market and proceeds shared equally among all partners.
- Consent to sell interest: Whereas buyout agreement doesn’t exist then there might be nothing to stop a partner from selling their interest in an investment. That’s why it’s unwise to start a partnership without a buy-sell agreement in place.
- Consultation: One of the most important things in any partnership is ensuring the business keeps operating no matter what’s happening. As such, you might want to take time and approach the partner who wants to take over. In most cases negotiations always work if you provide the reasons why you want to sell your stake well and understandably. Some of the reasons might be so easy to deal with while others might be something the other partner had no idea about. In many instances, the partner who want out no matter what is always willing to let the other take complete ownership of the business. Some just want to be released from any future and eventual obligation related to the company, which could be what you may want.
When to Seek Acquisition Legal Counsel
In many instances all you need is prior agreement that you entered with your partner before the beginning of the business covering lots of matters, including dissolution/buyout guidelines. However, if you don’t have one, you might want to seek the counsel of an acquisitions’ lawyer prior to moving on with any buyout process.
Know the Value of the Business
It’s possible that if you had come up with a buyout agreement at the beginning of the partnership you may have agreed to always ensure the business is valued, perhaps annually. If you don’t have such an agreement, before entering any negotiation do go ahead and have the business valued.
Related: How to Value a Business
In valuing the company, the consultants brought in will ensure all future expected profits are ascertained, including discounting projected future income for every month or year as per expected returns. While valuing the business pay attention to the expertise or client contacts you’ll be leaving with and their contribution to the success of the company. That way, you will know the value of the business without your input.
Funding the Buyout
At times you might want to sell your stake to your partner fast for diverse reasons, who may not have sufficient resources to fund the buyout. Buying your shares immediately or fast might not be easy. As such, you might want to be flexible with other types of financing, such as third-party funding, owner finance or even earn-out arrangements. Also, you can request a sale option where pay outs are done over a number of months or years.
Video: How To Buy Out Your Business Partner | Chandler Bolt
Mind Taxes and Selling Price
Whatever you make out of the sale could largely be affected by taxes even when the other partner is funding with their finances. You might want to find ways of minimizing the expected tax burden though you might need some strategic planning and time. As such, be very clear with the process of determining the sales price.
If there’s a buyout agreement, ensure it’s updated and the terms are still acceptable. Also, you might want to clarify whether the agreement shows the process of determining the sales price. In essence, understanding the agreement is key in every way. Where the buy-sell agreement is non-existent or terms have changed so much and no longer acceptable across the board plan to negotiate everything.
Plan and Plan Some More
Contingency planning is vital in any partnership. In most cases, partners in business can cover one another so well that they offer some form of false security. In the process, you might even forget to prepare accordingly as you need to. If your plan has always been to sell to your business partner, any unforeseen eventuality can bring a lot of unplanned heartache and problems, such as illness, business damage, and disability among others.
Also, just when you’re ready to sell to your partner they might indicate their disinterest or simply lack the funds to complete the buyout complicating your plan. That’s why you need to always have a contingency plan in place that looks at most possible scenarios.
You cannot really prepare perfectly for everything. In the best possible circumstances, everything will be agreed and negotiated smoothly and amicably with or without a buyout agreement. However, some conflict and differences might result and the process of transferring ownership to your partner concludes not so amicably. No matter what, always do your best to remain as professional as you can while keeping everything civil without rousing anger and angst.