The Four B’s: Effective Attributes When Buying Out Your Partner
Typically, there are clear reasons why you must buy out your partner. They can range from moderate to serious professional or personal reasons, but most of the time, we have found that the drivers beyond a partner buyout are relatively subtle.
Whatever the reason, buying out your partner is tricky and can become ugly. If, like most companies, you don’t have a highly detailed and well-written buy-sell agreement, the buyout gets incredibly messy.
There’s more than a transaction at stake.
When partner buyouts go badly, they can lead to expensive and distracting litigation, relationship issues between and among numerous people beyond just the partners, reduced employee morale, destruction of the company’s brand, and can even lead to the destruction of the company itself.
The four B’s
At the outset, keep in mind The four B’s for navigating a partner buyout: be empathetic, be direct, be transparent, and be generous. These four attributes help maximize your chance for a successful transaction, particularly if you are the majority or a 50/50 shareholder.
In many cases, your partner wants to be bought out. Someone who wants to be bought out might be willing to be your partner in performing a quick and painless transaction. However, in other cases, your partner will be surprised by a buyout offer. Initially he or she will interpret the offer similarly to being fired. They are going to be hurt, feel disappointed, or feel betrayed. Give him or her the space to have those feelings. Don’t try to achieve an immediate agreement.
When the dust clears and your partner has had an opportunity to emotionally process your offer, (and, likely, hire an attorney), make a buyout offer, in writing and approved by your legal counsel. A common mistake that needlessly prolongs and antagonizes the buyout process is for the buying shareholder to try to negotiate in a passive-aggressive manner, putting forth quasi offers to elicit a reaction from the potential seller and use that information to proceed. Don’t make that mistake—it’s manipulation. And it will only make a difficult situation worse.
Unless your shareholder or operating agreement calls for a specific buy-sell formula, engage an independent business appraisal from a professional who works in that capacity full time. Ideally, you and the selling shareholder should agree on the person to perform the appraisal. However, even if you must go it alone, you will find it useful to have an independent appraisal in-hand to calibrate your offer and make it available for the seller’s review. This enables you to make offers with confidence and signals that you are trying to treat the seller fairly.
Recognize that it’s very likely your partner is under no legal compulsion to sell. He or she can simply decline the offer. And, if he or she has been working in the business as well, they may choose to quiet quit. At the same time, they and their legal counsel will make sure that they are exercising all of their rights as a shareholder, frequently asking for financial records, insisting that formal board meetings be held, and monitoring whether your compensation is consistent with the market and not overly generous. Accordingly, consider making an offer that is above fair value. Ideally, make a financial offer that gets the seller excited about leaving. Of course, your generosity can’t be unlimited, but it’s unwise to try to “win” the transaction unless you have unusually strong leverage.
Buying out a partner is stressful but sometimes may be necessary. The process doesn’t have to be ugly. By following these four B’s, you can maximize the probability that your transaction can be completed with minimum disruption, and that it can be completed at all. As always, arm yourself with quality and experienced advisors to help achieve a positive outcome.