How to Finance a Partnership Buyout

If you’re looking to finance a partnership buyout, you may feel stressed about the whole process. Even when you and your business partner are on good terms, it’s still a difficult time as you plan, strategize, and finance the transition. As well as dealing with the partner buyout, you also must continue running the business and ensure that it’s unaffected by the turbulence behind the scenes.

In today’s guide, we’re going to address the key steps involved in a partner buyout. In the first half of the guide, we’ve got some advice to simplify the transition. In the second half, we’ll look specifically at funding. This includes traditional business loans in addition to alternative funding and alternative lenders that you may not have considered.

Without further ado, let’s get into the information that you need for a successful partnership buyout!

Laying the Foundations for a Successful Buyout

If you want to ease the stress and pressure of the process, here are some of the things that you can do to accommodate the buyout.

Accept the Decision

After working so hard together for so long, business owners often have a hard time accepting when their business partner wants out. However, you can assume that this isn’t a decision that they have taken lightly. Whether they want to move on to a new venture or retire, accept their decision to leave everything on good terms.

Even if you don’t get along so well, remember the good times, and try to remain amicable through the process. Why? Because this is the best way to find solutions that work well for everybody. Even if you’re angry or disappointed, these emotions won’t get you anywhere in terms of the buyout.

Talk with Your Partner

Often, one of the biggest mistakes that we see business owners make is failing to talk with their partners. With a simple conversation, you can make the process infinitely easier and less confusing. If you can find common ground before other parties get involved, you won’t need to pay as much in professional fees because you will have already ironed out a few of the problems.

If things really aren’t going well, use a mediator to guide discussions and ensure that the talks are productive.

Get an Independent Valuation

Of course, the departing partner will value the business high while the remaining partner values the business low. Is this really a surprise? The best way to avoid arguments and debates is to get an independent valuation. Then, you’re working on objective advice that doesn’t lean one way or the other.

An independent party will consider the following three things:

• Future cash flow
• Balance Sheet
• Expected profit

Hire Professionals

To accommodate and fund a partner buyout, one of the best things that you can do is contact experts for help. For one thing, they’ve been through the process before and know what it takes. They recognize the potential pitfalls, understand the emotions involved, and know the path to the best result.

As an example, some of the professionals you can hire to assist the process include an attorney, accountant, and banker. While the accountant prepares your accounts for an accurate reading, a banker helps with financing (more on this later!). Meanwhile, an attorney knows the laws of the state and the best ways to manage the buyout legally.

Highlight and Address Potential Problems

During the partnership buyout, you should keep an eye out for potential problems and address them as soon as possible. For example, smaller businesses will need to fill the gap left behind by the partner. It’s easy to get distracted by the fact that your partner is leaving, but what gaps will their departure create? Are they the top salesperson in the business? Do they have lots of contacts? Will your clients follow them to a new business?

As well as anticipating these problems, work with your partner and other professionals to protect your business. Can you sign a non-compete agreement so that your partner cannot launch a new business in the same field? Can you hire a salesperson to cover the loss?

Create Clear Terms

We’ve suggested holding meetings with your partner and various professionals, and you should consider documenting these meetings. Accurate records prevent confusion and misunderstandings - you’ve also got a written record to support you later in case something goes wrong. As well as defining the role of each partner, think about the influence and responsibilities of all important parties in the coming months and years.

Ultimately, the very best partner buyout agreements occur when there’s a balance between amicable behavior and accurate record-keeping. Often, partners think that they don’t need to document everything because they’re so close. More often than not, this leads to problems. As soon as something goes slightly wrong, the fact that neither side has evidence can lead to poor results.

Even if you’re great friends with your business partner, go through the proper procedures, get the business independently valued, document all conversations, and don’t let anything get in the way of a smooth transition.

Formalize the Structure

As part of creating clear terms, we recommend formalizing the structure of the arrangement (something helped by an attorney!). Depending on your state, you might dissolve the partnership. What’s more, you’ll need to transfer all legal documents and accounts into the remaining partner’s name. Even if the deal goes through smoothly, failing to change official documentation means that the partner can still be held accountable for certain business responsibilities.

In terms of structuring a deal, the best way forward is to address the needs of all parties, compromise, and ensure that everybody walks away happy.

Financing the Partner Buyout Process

At this stage, we’ve come to the difficult part for the partners who want to stay in the business and take operations over alone. Your partner has rocked you with the news that they want out…what next? You don’t want to end everything after working so hard to get the business going and enjoying some success. In this case, you’ll need to finance a partnership buyout.

These days, you can finance a buying in several different ways. As well as traditional bank loans, you’ll also find alternative lenders and other methods. If you’re trying to get your head around all your options, why not choose a company like the South Florida Funding Group to help finance the move?

Here are some options to explore as you look to buy your partner out of the business:

Equity Financing

In the past, many business owners have chosen to replace their partner with many others by making their shares available to investors. If you find hands-off investors, you regain control of the business without having to find the funds to replace the outgoing partner.

Of course, this isn’t the desired option for those who want to own 100% of the business. Also, you might not want to answer to investors.

SBA Loans

Every year, the Small Business Administration (SBA) helps small business owners access the funds that they need for various projects. Although qualification is often difficult and lengthy, the SBA secures a large portion of the loan so that you only need to secure a smaller amount. During a partnership buyout, especially one that comes by surprise, this is helpful.

Specifically, you’ll want to look for a 7(a) loan from the Small Business Administration. However, keep in mind the lengthy and difficult application process. If your partner wants a quick exit, this could cause issues.

Bank Loans

If you have a good relationship with a bank, you may qualify for a traditional loan. You borrow from the bank, pay your partner to leave the business, and pay the amount back over time. Since the bank is a reliable source of funding, you’ll enjoy favorable rates.

The problem? Qualification for a bank loan will rely on a strong financial history and a good relationship with said bank. Without either or both, you could struggle to secure funds. Not only is the business taking on more debt, but you’re also losing stability as your partner leaves the business (and this will repel many lenders).

Property Refinancing

If your business owns a property, another method to finance a partnership buyout is to refinance this property. As you refinance the asset, you gain enough funds to pay the partner while keeping the business. While this might mean more repayments in the future, you successfully navigate the buyout process and can grow your future from here.

Agree to a Long-Term Payment Plan

Depending on your relationship with your business partner, you could request a long-term payment plan to buy them out of their shares slowly. Essentially, the departing partner is the lender, and you pay them a set amount per month until they have received the agreed value.

Naturally, this won’t work for deteriorated relationships nor for those who want a quick exit rather than a drawn-out payment plan. Yet, there’s nothing wrong with asking because you could create a plan that works for both parties. You don’t need to fund a partner buyout all at once and the partner gets regular income.

Alternative Lenders

Often, alternative lenders come to the rescue of business owners when they have exhausted all other options and they feel as though nothing will ever work. As an example, you might use a peer-to-peer lending service. Here, you’ll borrow from multiple lenders to buy your partner out of the business. Then, you’ll repay the lenders (with a small interest payment on top).

Over the years, the P2P lending niche has grown exponentially because it allows for beneficial deals for all parties. While borrowers get the amount they need, lenders earn interest on whatever they give to others. As a business, you can avoid traditional loans.

Elsewhere, you’ll find forms of alternative funding at the South Florida Funding Group. If you want to fund a partner buyout, get in touch with our professional team and we’ll help you choose the right option to not only overcome the current obstacles but also for the long-term health of the business.

We can help your business with SBA loans, as we’ve discussed, as well as the following options. While they might not seem useful at first, even solutions like equipment financing can free cash that you can put towards the buyout.

• Unsecured and Secured Business Loans - Here, you’ll secure funds based on either your creditworthiness or an asset in the business. If you get a secured business loan, remember that your asset will act as collateral if you fail to meet the required payments.

• Business Line of Credit - Like a personal credit card, the business will have access to funds as and when you need them. This can often ease cash flow concerns after a partner buyout.

• Equipment Financing - If your partner’s revelation has come at a bad time, you could use equipment financing to spread the cost of new equipment over a longer period. In turn, this could free up cash for the buyout.

• Merchant Cash Advance - Small businesses could fund a partner buyout by using a merchant cash advance. Although perhaps not feasible for larger businesses, it works by lending money and taking repayments as a percentage of all future revenue.

Summary

Hopefully, reading this guide has made you realize that you have options. To finance a partnership buyout, one of the most important things is planning. As you plan and consult the right people, you’ll choose an option that allows you to buy out your partner while also securing the long-term future of the brand.

Depending on your financial position, you might choose the traditional route of a bank loan or SBA loan. If qualification is difficult or you can’t wait for the extensive application process, you might turn to alternative financing and alternative lenders.

If you need help, contact professionals like the South Florida Funding Group today!