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How to buy out your co-founder

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by Startacus Admin

how to buy out your co-founder

“It’s not you, it’s me.”

The immortal words of clichéd breakups everywhere. Business partnerships, like any relationship, can come to an end. With any luck, the end of yours will be amicable and for reasons that benefit you both, but this won’t always be the case. When it comes to unpleasant breakups, things will naturally be harder; but perhaps a tub of ice cream will help.
Right at the beginning of your business venture, you should have created a partnership agreement regarding the running of the enterprise, decision-making responsibilities, and the like.
This document should also have included a strategy for the event of a dissolution of the partnership. This is particularly beneficial if the break up is an unpleasant one, as the last thing you’ll want to do then is sit down and negotiate the logistics of the split.

Here we go

The first step is to determine if a buyout is the best thing for you. There are alternatives to a straight buyout. You could assume a majority share, effectively making you the decision-maker, etc., while your partner retains a smaller share in the business but releases control. You could sell your own share of the business and walk away - not ideal, perhaps, but if your partner is being difficult, it might be the best way; you could also dissolve the partnership altogether and start fresh.

If you feel that a buyout is your best option, you’ll need a business evaluation, not only to ensure that a buyout is a good investment but to determine the right price. We have written an article about how to valuate your business, but in the interest of keeping everything above board and leaving no room for accusations of wrongdoing, the best way to go in this instance is to have an outside firm perform an independent valuation. Make sure that your partner’s absence will be factored into the valuation, as the removal of their skills, expertise, contacts, etc., could very well have an effect on the value.

how to buy out your co-founder

To ensure that everything goes smoothly and you don’t miss any vital steps in the process, you’ll want to hire a mergers & acquisitions solicitor. This solicitor will know all the laws and regulations regarding the buyout and will ensure mistakes and confusion are avoided.

Now that you know what the business is worth and how much you’ll need to fork out to your almost ex-partner, you’ll need to work out where that money is going to come from. This is the tricky part. Chances are, you won’t be able to afford to simply take out your wallet and hand over the cash (if you can you’ve either been doing something very right or very wrong!). Buyout capital typically comes in one of two forms: debt or equity.

Finding a lender will be difficult because a buyout isn’t actually going to benefit the company in the short term, even if your partner is holding it back. Banks and other lenders will be looking for a way that their capital will increase your business’s profits, thus allowing you to pay them back their loan and interest. Given how unlikely this is, persuading them to give you that loan in the first place is equally unlikely.

how to buy out your co-founder

Your best option then is to open your own wallet. With any luck, and your natural charm of course, the process will have remained amicable to this point. With the aid of your acquisitions solicitor, you can work out a suitable and fair payment plan that will achieve the buyout over time.

This will almost certainly include interest (as though your partner was a lender) and this is in large part why you’ll want to have maintained a friendly relationship with them; a bitter and hostile partner could make things very difficult for you in all sorts of ways, but demanding a disproportionate interest rate could be the worst.

Once you have finalised the details of the buyout, it’s time to make it official. There will be paperwork to file, accounts to be transferred, and your ex-partner’s name will need to be taken off everything. There are documents to clear their legal ownership and release them from liability, so you’ll be particularly glad at this point to have hired that acquisitions solicitor.

Hopefully, by staying professional regardless of whether your partner is amicable or hostile, and by following these simple tips, the dissolution of your partnership will be win-win.Become a member of the Startacus Community

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Published on: 2nd November 2016

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