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I have a business partner for 5 yrs. I would like to buy him out. I just bought a house, money is tight. Help

It's been 5 years and I would like to buy out my business partner. I just bought a house a year ago so money is tight right now. I just can't shake the fact that I have to consult him all the time with my business decisions. Sometimes they are approved by him and sometimes not. Any suggestions or recommendations are greatly appreciated.

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David Collins
Glentyde Capital Advisors, Inc.
CEO / Owner
Mecklenburg County, NC

In certain situations some variation on the following structure gets the job done. Think of it more as a general idea, to which you'll have to adjust and tweak for the specifics.

Does the business currently provide positive cash flow to both you and your partner? And more importantly to this proposed buyout structure, will it continue to generate MORE cash flow than what you need to live on, after your partner's gone? If so, you might employ some variant on the following...

1) You and your partner agree on a value for his share of the biz. (If you have a formal partnership or operating agreement, a valuation methodology is usually specified and agreed to therein, so consult those docs.)
2) Your partner agrees to be taken out with a note. (The size of the note could be reduced, if there's excess cash available on your balance sheet for a partial payout upfront, or the biz has some untapped borrowing power against its assets. But you've GOT to make sure you don't damage the biz with overleveraging.)
3) The former partner's note is paid off over time from the company's excess cash flows; that is, those profits the biz generates in excess of what you need to draw out for your own purposes. (Your former partner might insist that your monthly draws be subordinated to his monthly note payments--that's why you want to be very confident the biz's net cash flows will exceed the note payments, leaving you with sufficient funds each month or quarter.)

And most definitely, let a tax pro help draw up the details--one who's really got the chops when it comes to partner buyouts. There are various ways you can spin the above basic idea, but these variations usually have different tax ramifications (and planning opportunities).


Jul 5, 2009

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