Whether your business partner is a close friend, a member of your family, or it’s strictly business, there often comes a time when you and your partner seek different paths. Having a partner want to make an exit can have major consequences for your business venture, especially if there’s a disagreement between you and your partner. Regardless of the circumstances, it’s usually necessary to buy out the exiting partner’s share of the business.
Partner buyouts, when done with proper care and due diligence, can go amicably and relatively quickly. But sometimes these breakups can be messy, with financial or personal issues getting in the way of a clean buyout. And if you purchased a building or office space as part of your business partnership, that can add a layer of complexity to any buyout.
Small business owners may not have the capital on hand to buy a partner out right away, which can drag out the process and have unintended consequences for the wellbeing of the business. To avoid this, many business owners seek external financing to complete their partner buyouts quickly, preserve professional relationships, and ensure that the health of the business isn’t affected by an extended transition period.
If you’re considering buying a partner out, do what you can to remain as amicable as possible with them.
Even with the exit of a business partner, they’re as much a part of the buyout process as they were part of your business operations. If you have a well-written partnership agreement, the terms for a buyout may be a part of that document. It’s only a matter of having the capital, if necessary, to meet those requirements.
But if you don’t have provisions for a buyout already in place, you’ll have to negotiate the terms of the buyout with your partner, which is why you should try to remain friendly and professional with them. A contentious partner can make the whole process much more difficult and expensive. Be as open, transparent, and calm about the process as you can with your partner.
One of the best ways to keep things smoothly moving forward with a buyout is to plan an independent business valuation. This will do away with all the guesswork about the real value of the business, reveal any liabilities that you may or may not be aware of, and ensure that the buyout offer is fair to everyone. Not only is this helpful to negotiating a buyout, but also helps with developing strategies for resolving debt, structuring the buyout loan to also provide for remodeling or equipment upgrades, and so on.
Consider hiring a lawyer, even if the partner buyout is under good terms.
Every state has its own laws when it comes to business ownership and buyouts. Unexpected issues relating to complying with the law can turn an amicable buyout sour, and grind a contentious one to a halt overnight. This is why we recommend consulting with a lawyer who specializes in this area of the law. Find someone both you and your partner agree to, and agree beforehand to comply with any recommendations they make.
Under positive conditions, a lawyer helps ensure that all paperwork is filed by the required deadlines, and can finalize any terms still under negotiation. If your partner isn’t cooperative or communicative, a lawyer will be far better equipped to navigate the added legal complications.
If you and your business partner purchased a piece of real estate for your company, the buyout will have to deal with both their share of the business and the property itself. In this case, you may want to look for a lawyer versed in local real estate law.
Many business owners try to buy out partners through long-term repayment agreements or traditional financing options, but these all have significant complications.
Ideally, every business owner who wants to buy out a partner’s share in their company would be able to do so with their own money. But this isn’t often isn’t an option, as few have the capital available for a lump sum buyout, and negotiating a years-long payment schedule can be challenging.
The latter situation is complicated for a variety of reasons. If you choose to self-fund a buyout, but do not have the capital to fully buy your partner out right away, your partner will essentially act as your lender, and collect on that loan—often with interest—over a pre-determined period of time. Depending on the terms of your buyout, they may stay on as part of the business until you finish paying what is owed, and potentially continue to have a say on decision-making and strategy.
This is not an ideal set up if relations with your partner are strained, or you disagree about what’s best for the business.
Most business owners try to avoid this by using equity or debt financing to fund a partner buyout. Depending on your business and the nature of your partner buyout, one or both of these options can be viable, but they do come with some drawbacks worth considering.
With equity financing, you’re essentially selling your partner’s shares in the business to investors. This does remove your partner from the business, but you’re trading one partner for another (or many others, as the case may be). If the intent of your partner buyout is to take full control of the business, this doesn’t necessarily fulfill that goal.
Debt funding buyouts through the SBA
Alternatively, many business owners choose debt funding to complete a buyout, taking out additional loans and accruing more debt in the process. This can be the financing solution for any buyout and puts the business firmly under your control, but it isn’t necessarily easy or quick.
Some business owners look to the Small Business Administration, specifically 7(a) loans, but these can be difficult to qualify for. The SBA requires good financials on the borrower’s part, and the borrower must provide a detailed strategy for ensuring the profitability of the business after the buyout. While it is relatively quick to apply for a 7(a), the approvals process can take months, during which time your buyout is in limbo.
If you are unable to qualify for a loan through the SBA, you could potentially turn to a bank for a loan. Unfortunately, most banks are going to be reluctant to grant a loan for a buyout, and if you were turned down by the SBA, you may find similar difficulties here. From their perspective, you are taking on more debt, while losing the stability provided by your former partner. There is little guarantee that the partner buyout will result in the profitability and success necessary to ensure you can pay them back.
Refinancing a property
Sometimes, multiple business partners will invest in a piece of real estate in order to house their company. If some of these partners decide to exit the business in the future, you’ll have to deal with not only their share of the business, but the building itself. The remaining partners can fund the buyout by refinancing the property. Similar situations can happen with properties owned or inherited by multiple members of a given family when there’s a disagreement on what to do with the property.
Financing a partner buyout with a hard money loan may be the best option for your business.
Because a partner buyout can be a time sensitive situation, a hard money lender like Socotra Capital is the best choice to help you quickly finance the buyout. Our loans are not bound by the same restrictions that steer many banks away from financing partner buyouts. In addition to financing the buyout, our loans can help you pay off any existing debts your business may have accrued over the course of the partnership, or fund critical improvements to your business location.
If you’re interested in financing a partner buyout, contact Socotra Capital today! We’re ready to work with you to find the best solution for your business and ensure that you and your former partner can complete the buyout as quickly and painlessly as possible.