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Buying out a partner

On Behalf of | Apr 26, 2018 | blog

A business partnership can be a lot like a marriage. You share the same dreams and make plans, spending a lot of time working hard to make them happen. Sometimes, when there is a disagreement there is no way to resolve it other than what feels like a divorce.

Buyouts happen all the time in the financial sector because partners see a need to go their separate ways. It can happen without a lot of emotions, but it’s important to be ready for the worst even as you hope for the best. As with everything in finance, attention to details makes all the difference.

Preparing for the buyout

Before the actual separation, or even a solid offer to go your own ways, a lot of preparation is necessary. The important steps include:

  • A thorough review of the operating agreement and legal status. Are you a partnership, limited liability partnership, (LLP) or a limited liability corporation (LLC)?
  • A valuation of your business, especially the assets that the partner being bought out will take with them.
  • A review of your options. Will the business by dissolved, as has to happen for a partnership or LLP, or should it continue as an LLC?
  • An understanding of the paperwork that will be necessary.

Many of these details are highly technical and specific. A consultation with a commercial litigation attorney who is experienced with business formation is going to be essential. It is very likely that you will need to have an attorney draft the final agreement.

Why commercial litigation?

No one wants their partnership break-up to wind up in a complicated civil lawsuit. But an understanding of what might happen if it does can help both parties from becoming so tied up in the process that they lose sight of the importance of amicable buyout.

Most disputes can be mediated, and should be. It is rare that the situation is so complicated that it has to wind up in court. But being prepared for that situation is often the best way to prevent it from happening.

Funding the buyout

It is unlikely that your firm has all of the cash on hand to perform a buyout of one or more partners on its own. A small business loan is going to be difficult.

Buyouts usually take the form of removal of assets for this reason. Client lists and related assets are likely going to be split up between the partners. An understanding of this process is important and should be stated right at the beginning of the buyout procedure

Release from liabilities

Lastly, it is important to understand the ongoing liabilities which exist from the partnership. If your company is not an LLC, it may not be possible to fully release a partner from all liability, even after a buyout. A complete understanding of them is going to be essential.

Dissolving a partnership is difficult financially and emotionally. It’s vital that you take it on with a clear head an appropriate assistance so that it can move forward as cleanly as possible for the benefit of both partners.