How to Have a Buy-Out Conversation with Your Business Partner
A difficult conversation that’ll require tact, grace, and preparation so that everyone involved can hash out a deal effectively
Navigating a business buyout conversation can be challenging, particularly when it involves saying goodbye to a business partner.
Whether due to differing visions, personal circumstances, or simply because it’s the right time for a change, approaching this conversation requires tact, preparation, and a clear understanding of mutual goals.
Here’s how you can handle this conversation effectively.
Prepare Beforehand: Get a Valuation
Before you sit down for the buy-out conversation, you have to understand the financial health of your business, specifically its valuation.
This will play a significant role in the negotiations. Get a professional valuation to have a concrete figure to discuss. These are the three common valuation methods used:
- The Asset Based Valuation
- The Discounted Cash Flow Method
- The Multiples or Comparables Framework
You can learn more about these methods here.
An accountant or business appraiser can help you decide which method to best use. But just know that part of the negotiation process will require you and your business partner to agree on which valuation method to use.
Pro Tip: Depending on your industry, one method might be more useful than others. Some business partners get all three and average out the valuation as a way of anchoring the negotiation. Whatever you decide, make sure there is buy-in from all parties.
Establish the Negotiation Tone Early On
How the business partners approach the discussion early on will set the overall tone for the negotiation.
Can the partners be honest about their underlying motivations for why someone wants to leave or is “being pushed out?”
Sometimes this can be difficult — even emotional — but transparency about one’s motivations early on leads to more successful and quicker deals.
A study in the Journal of Corporate Finance found that transactions with higher transparency are 15% more likely to close successfully and do so more quickly than less transparent dealings.
By setting the tone early on, business partners learn to expect that the other will be open, building trust, effective communication, and minimizing post-deal disputes.
The issue?
Since a buy-out conversation might be predicated on reasons where the partners may disagree, they risk bringing along this energy (along with any resentment or bitterness) into the negotiation, impacting their ability to hash out a deal later on.
Prepare for Multiple Conversations
Rarely will a buy-out be agreed upon in a single conversation. Be prepared for multiple discussions as you navigate through all the details.
Pro Tip: make sure to review any existing partnership agreements or shareholders’ agreements to see if any terms and conditions apply to the buyout.
I’ve seen buyout negotiations take anywhere between one month (when all parties are hungry for a deal) to up to a year (when people are underprepared, don’t reveal information, don’t know what they want, or there are business circumstances that are beyond their control).
Patience is key. You’re more likely to send multiple proposals to each other and come back to your business partner with questions and/or counteroffers.
What Items Will You Discuss? The Valuation, Terms, and Other Considerations
There will be a variety of discussion items that you and your business partner will need to consider and agree upon:
- Which valuation method will be used and why (it’s here that deeper motivations for why each person is considering a buy-out should be spoken to. The goal is to arrive at a fair arrangement that respects the contributions of all partners).
- Potential buy-out deal structure, including payment schedules, interest rates, financing terms, whether any part of the buyout will be paid in a lump sum or via installments, etc.
- Future earning potential of the business. If the business is expected to grow significantly, the departing partner might want a premium for giving up their share of future earnings. Conversely, if the business’s future is uncertain, this can affect the valuation and terms of the buyout.
- Tax considerations, since all parties involved will want to structure a deal that minimizes tax liabilities associated with the transfer of business ownership.
- The exit timeline, any noncompetes (if applicable), and what will be said to any relevant stakeholders regarding why the business partner may be exiting.
Think About the Following: a business buyout isn’t just about ending a partnership; it’s about the future of the business and the individuals involved. Discuss what the business operation will look like post-buyout. If one partner is continuing with the business, consider how the transition and responsibilities will be handled to ensure business continuity.
Draft Legal Papers
It’s wise to involve legal and financial advisors early on in the process.
They can provide crucial guidance on the legal ramifications of the buyout and help structure the deal to minimize financial risks and tax liabilities.
An experienced mergers and acquisitions lawyer can also help you draft your legal document according to any state-specific laws.
Remember, most buy-out conversations will necessitate either:
- A Dissociation: this means one partner is withdrawing from the partnership and the other remaining business partner will buy out the departing partner’s interest in the company.
- A Dissolution: this means the business winds up its business activities; assets are split, debts are repaid, and the business will usually shut down.
Depending on your situation, your attorney will draft and file the appropriate paperwork should you dissociate or dissolve the business entirely.
Involve a Neutral Third Party to Help
Bringing in a neutral third party can streamline the negotiation process, help manage emotional tensions, and ensure that all technical aspects of the buyout are handled competently.
By selecting an appropriate expert based on the specific needs and challenges of the negotiation, business partners can facilitate a smoother and more effective buyout process, paving the way for a successful future for both the business and themselves.
Here are some types of neutral third parties you can consider:
A Professional Mediator
Professional mediators specialize in conflict resolution and can help partners navigate complex emotional and financial discussions. Find one who is trained to handle these types of buy-out conversations impartially while facilitating a productive dialogue without taking sides. Mediators can be particularly helpful when negotiations become stalled or when personal conflicts overshadow business issues.
Financial Advisor
Financial advisors can serve as neutral parties by providing unbiased insights into the financial aspects of the buyout. They help ensure that all financial data is transparent and understood by both parties, aiding in fair valuation and structuring of the buyout deal. Financial advisors can also model different scenarios, showing how various buyout structures could impact each partner’s financial future.
A Mergers and Acquisitions Attorney
A mergers and acquisitions attorney can help in interpreting and drafting legal documents and ensuring that all legal requirements are met during the buyout process. Their expertise is crucial in navigating the legal intricacies of buyouts, such as compliance with local business laws, tax implications, and the drafting of binding agreements that protect both parties’ interests.
Industry Expert
Consultants with specific industry knowledge can provide valuable insights into the business’s market position and potential. They can help assess the business’s operational strengths and weaknesses, which can be crucial for understanding the long-term impacts of the buyout. This is particularly useful when the buyout’s fairness or valuation is disputed due to differing views on the business’s future prospects.
Business Coach
Business coaches who specialize in leadership and organizational development can assist during transitions by focusing on the human elements of the buyout. They can help partners manage the emotional aspects of the separation and ensure that the leadership transition is smooth, minimizing disruption to the business operations.
Conclusion
Having a buy-out conversation with a business partner is a significant step that requires careful planning and consideration.
By approaching it with the right mindset, preparation, and respect for each other’s interests, you can ensure that the process is as smooth and constructive as possible. Remember, the goal isn’t just to end a partnership, but to set up everyone and the business for future success.
By handling the business buyout with sensitivity and thorough preparation, you transform a potentially stressful situation into a mutually beneficial resolution, paving the way for new opportunities and continued professional respect.
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Who am I & why should you listen to me?
I am a mediator, executive coach, and consultant that specializes in resolving co-founder disputes and helping founders become the best leaders they can be.
I have brokered high-stakes equity deals between founders, dissolution agreements, and have coached dozens of executives and business partners to lead a pace that aligns with or surpasses their startup’s growth. I’ve also consulted with the United Nations, USAID, MUFG/Union Bank, and more.
I have found that no negotiations are ever the same — and it usually comes down to the business partners’ willingness to move forward. You can learn more about my work at my website or connect with me via LinkedIn.
