What is a Partner Buyout?

Jessica Ellis

A partner buyout occurs when when or more ownership partners in a business decide to offer a partner a share of profits or cash in exchange for all or part of his or her interest in the business. There are many reasons a partner buyout can occur, including diverging interests or business ideas, unsatisfactory performance, or a simple desire to be a sole owner. Depending on the attitudes and level of preparation by the participants, a partner buyout can be a simple and smooth way to end a partnership, or a nightmare of fights and legal posturing.

A partner buyout can be a smooth and easy way to end a partnership.
A partner buyout can be a smooth and easy way to end a partnership.

Just as couples who plan to wed often sign a prenuptial agreement in case of a divorce, many businesses set up a partner buyout clause as part of their initial business agreement. Creating a buyout clause allows the partners to determine under what circumstances a buyout can occur, and how it will be structured. Though no burgeoning partnership likes to think ahead to a day when interests may part, creating this type of agreement can make the entire process simple if it becomes necessary. Having a clear, legal buyout clause can even help ex-partners remain friends while splitting business interests.

A partner buyout may occur when one partner wishes to be sole owner of a business.
A partner buyout may occur when one partner wishes to be sole owner of a business.

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If a partner buyout is on the table, both the remaining and potentially exiting partners need to do some specific research. It is important to get an exact idea of the net worth of the company, since this may determine the appropriate amount to offer the leaving partner. The net worth is determined by adding the sum total of profits, hard assets such as property or equipment, and other assets such as patented products, and then subtracting any debts or financial obligations. In some cases, the remaining partner will offer the targeted partner a sum slightly higher than his or her interest in the business, as incentive to accept the buyout.

The partner or partners that are planning to buy out also need to determine how to finance the buyout. If a partner's share in the business comes out to a high sum, such as $1 million US Dollars (USD), it is unlikely that the company will simply have that kind of money lying around in a liquid form. A business trying to buy out a partner may need to take out a loan, or a merchant advance against profits, in order to close the deal. Financing the buyout with outside sources can prevent any sudden damage to the business' profit margin.

It is likely that any discussion of a buyout will quickly require the intervention, or at least assistance, of lawyers. While hiring a lawyer may seem like an aggressive or hostile move, it can actually be a way to remove the pressure of direct negotiation from the principle parties. It is important that each side hire his or her own lawyer, as opposed to relying on in-house counsel. Hiring independent lawyers or an outside mediator can prevent any accusation of bias from the proceedings.

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