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How to prepare for a partnership buyout

On Behalf of | Mar 29, 2024 | Business & Commercial Litigation

Business partnerships can help people capitalize on the resources they have and access resources that they have not yet acquired. For example, one partner may have industry connections or a very innovative concept, but they may need support from someone who has experience running a business or the capital to turn that idea into a working business model.

Partnerships can theoretically last indefinitely and may lead to successful organizations. However, even when the business itself thrives, the relationship between the partners may eventually decline. One partner may become less committed to the organization as time passes or may never fulfill their commitment to the organization despite their contract.

Partners frustrated by the state of their relationship or eager to move on from a partner who has not fulfilled their obligations may decide to buy out their partner instead of dissolving the organization.

The process begins with a contract review

The business plan and the partnership agreement negotiated by the people starting the business can have major consequences for the buyout process. Someone typically needs to comply with contractual requirements, which may include offering certain types of compensation or severance pay. Failing to meet the standards outlined in the partnership agreement could trigger disputes, making compliance with the original agreement important for the transition away from shared ownership.

Partners need to understand the value of the business

To offer a reasonable amount for someone’s interest in a company, a partner must first understand what the company is theoretically worth. There are several different ways to value a business depending on the type of organization. Regardless of what type of valuation model someone uses, a transparent valuation process is important for negotiating reasonable buyout terms.

The issue might eventually go to court

Just because one partner proposes a buyout does not mean that the other has to accept the offer. Sometimes, partners may find that they butt heads about key terms and cannot negotiate a buyout. The business may suffer when partners find themselves at odds with one another, making the timely resolution of the issue important.

Partners who recognize that business litigation may be necessary may find it easier to approach the buyout process and successfully sever their relationship with a disappointing or underperforming partner. Seeking personalized legal guidance is often a wise first step in this regard.