Your business partner has decided to leave the company, and while you’re confident in your ability to lead the business forward successfully, their departure presents a significant financial hurdle: you need to buy them out. Because they hold an ownership stake, they’re entitled to compensation for their share of the business as they move on to new ventures. This buyout process can become particularly complex, and potentially disruptive, if they own a significant share of the company.
Imagine, for example, that your partner owns 40% of the company. After a professional business valuation is conducted, it becomes clear that the cost to buy out their share is far beyond what you can afford to pay in cash. Simply writing a check for that amount isn’t feasible. You might want to liquidate assets – selling off equipment, property, or other valuable holdings – or cut some of your workforce to generate the necessary capital. However, you’re concerned that such drastic measures would severely damage the company’s operations, morale, and long-term prospects, potentially undermining the very success you’re trying to maintain. The challenge lies in balancing the need to compensate your partner fairly with the imperative to preserve the health and viability of the business.
So, what do you do? Consider the following possibilities:
Secure external financing
One potential avenue is to pursue a business loan specifically designated for the buyout. This allows you to compensate your partner without having to liquidate assets or downsize your workforce. The advantage here is that you can use the company’s future income, now that you own 100%, to make the loan payments over time. Carefully research loan terms, interest rates, and repayment schedules to ensure they align with your business’s financial projections.
Negotiate with your partner for an installment plan
You could also offer to pay your partner in installments. Maybe you can agree on a set amount or percentage to pay them each year for a certain number of years. This way, you don’t have to come up with all the money at once, which is much easier on your business. It can also be cheaper than taking out a loan with high interest. Paying over time makes the cost easier to manage and keeps your business running smoothly. Make sure you both sign a written agreement that explains how much will be paid, when it will be paid, if there’s any interest, and any other important details.
Explore alternative compensation
Sometimes, depending on your business and what your partner wants to do next, you can find other ways to pay them. Maybe you could offer some cash and some ownership in a new project, or maybe they could agree to work for the company as a consultant for a while. These kinds of deals need some imagination and thinking outside the box.
Navigating a business buyout is a complex legal and financial process. Consulting with an experienced business law firm such as Corey Szalai Law, PLLC is highly recommended. We can provide invaluable guidance on structuring the buyout agreement, negotiating with your partner, and ensuring that all legal and regulatory requirements are met. We can help you understand your rights and obligations, protect your interests, and minimize the risk of future disputes. We can also help you explore less conventional options that might be appropriate for your situation.
These are just a few potential strategies, and each situation is unique. The optimal approach will depend on the specific circumstances of your business, your partner’s expectations, and your financial capabilities. Contact Corey Szalai Law, PLLC today to schedule a discussion to see how we can help you structure your buyout.