How to buy out a business partner

Business partnerships are often created from a shared vision and a desire to work together for the long haul. Yet, in the dynamic world of business, circumstances change, goals evolve, and sometimes, it becomes necessary for one party to consider buying out a business partner.

Your partner may be contemplating retirement, exploring a different entrepreneurial venture, or simply aiming to liquidate their investment. Conversely, you might harbor ambitious expansion plans or a strong desire to take the company in a new direction.

Whatever the motivation, it's paramount to understand the process in its entirety—from identifying and partnering with the appropriate professionals to engaging the right financing options. Keep reading to learn four valuable tips on how to buy out a business partner.

Contact the right professionals

A successful buyout may require professional support from experienced advisors. This can include lawyers who help draft legal documents, accountants who review financial records, and consultants who understand how best to structure a deal that benefits all stakeholders involved in the process.

Starting conversations—Attorneys can skillfully initiate and facilitate conversations with your business partner, potentially making the discussions more professional and constructive.
Assessing tax implications—Your accountant may be able to assess the tax implications of the buyout, helping you structure the deal in a tax-efficient manner.
Exploring buyout financing options—A lender or financial consultant can advise you on various buyout options, such as business loans or other types of financing, and help you choose the most appropriate one for your situation.
Involving other professionals—There can be value in bringing in other professionals too, like a business advisor. Their expertise can ensure a well-rounded approach to the buyout process.

Get a valuation to determine the value of your partner's stake

One of the critical aspects of a business partner buyout is determining the fair value of your partner’s stake in the business. This is where an impartial third-party valuation becomes essential.

To calculate the fair market value, a professional appraiser may consider various factors, such as the company’s financials (i.e., assets and liabilities) and market conditions.

Here are a few factors that go into calculating a valuation:

Projected revenue growth
Forecasted margin growth
Shareholder cash returns
Debt-to-equity ratio changes
Economic conditions in the industry
Geographic market volatility

Calculating the appropriate partnership buyout price requires close evaluation. An experienced third-party company can help you navigate the process step by step.

Refer to your buy-sell agreement

A buy-sell agreement is a crucial document in the partnership buyout process, particularly for businesses with multiple owners. It’s designed to provide both parties clarity and protection as they approach the transition in business ownership.

Here’s what you should review from your buy-sell agreement:

Valuation clause—The agreement will outline whether the value of a partner’s business interest is calculated using a fixed price or formula or should be based on an independent appraisal at the time of the buyout.
Payment terms—Refer to instructions on how and when the payment should be made per the agreement. Options may include a lump sum, installment payments, or a combination of both.
Contingencies—Stay aware of any conditions that must be met for the buyout to proceed. This could involve securing external financing or obtaining regulatory approvals.
Rights and obligations—Understand the rights and obligations of both parties during and after the buyout process.

Consider financing options for the business partner buyout

A financial professional is the best resource to advise on available financing options. Some of the most common financing options used to buy out a business partner include:

Business loans—A business acquisition loan may provide the necessary capital to purchase the stake of the departing partner and provide you with the flexibility to pay back the loan over an extended period. Compared to bank loans, BHG Money offers large loan amounts, extended terms,¹ and the support of a dedicated team to guide you through the process.
Self-funding—If you have enough cash flow in your business or personal accounts, you may be able to self-fund a business partner buyout. However, the sum of money required is often too large for most to pay in a lump sum and could put your savings and business at risk.
SBA 7(a) loans—You may be able to get the funding you need for a partner buyout with the help of the Small Business Administration (SBA). But compared to the rigid requirements that come with SBA 7(a) loans, online lenders like BHG provide funding with minimal paperwork and no personal collateral required.
Partner financing plans—Another option is to set up a financing plan with your partner where they receive payments over time rather than one lump sum payment at closing.

With careful planning and patience, it’s possible to navigate a mutually beneficial situation where all involved parties can come away with their desired outcome. Once an agreement has been reached between the parties involved in a buyout, it is essential to transfer any legal documents and accounts associated with the business. This includes transferring ownership of any assets or intellectual property, bank accounts, and other financial records.

Get financing support from BHG Money
Purchasing a business partner's equity share is a significant decision, necessitating meticulous planning, legal expertise, and transparent communication. Seeking professional guidance can help you successfully navigate the buyout process, safeguard your interests, and ensure the continuity of your business.

For financing options tailored to your buyout strategy, look no further than BHG Money. With business loans up to $500,000^1,2 and flexible terms of up to 12 years,¹ you can take advantage of affordable monthly payments. Plus, our concierge support team is available to guide you through our streamlined lending process. Get started today by viewing your personalized estimate online.

FAQs
What happens to a partnership when one partner buys out the other?
When one partner buys out the other, it generally results in a change of ownership. The departing partner essentially relinquishes their ownership stake and involvement in the business.

How do you negotiate a partnership buyout?
Negotiations for a partnership buyout typically take place alongside financial and legal professionals who help to ensure each party’s needs are met. Common terms that are negotiated during a buyout are payment structure, payment timelines, tax obligations, and the method of transfer of ownership.

How do you record the buyout of a partner?
When buying out a partner or co-owner, it is advantageous to record this transaction as a business purchase on your business ledger. To ensure proper tax deductions at the end of the fiscal year, it is essential to meticulously categorize the buyout payment across the appropriate expense categories.

¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence.
² BHG Financial business loans typically range from $20,000 to $250,000; however, well-qualified borrowers may be eligible for business loans up to $500,000.
No application fees, commitment, or impact on personal credit to estimate your payment.
For California Residents: BHG Financial loans made or arranged pursuant to a California Financing Law license - Number 603G493.