How to Buyout a Business Partner (Part 1)

Buying out a business partner is like a divorce of sorts: the split can be emotional, complicated, and pivotal for your future. Handled correctly, a business partner payout can resolve conflicts and set the stage for smoother operations under a new ownership structure. Handled poorly, however, that payout could lead to financial strain or even legal difficulties.

In this three-part series, we’ll walk you through the legal, financial, operational, and governance considerations of a partner buyout, with insights taken from real business partner buyouts we have participated in, representing the buyer in some instances, and the seller in others.

This Part One covers the signs it’s time for a buyout, how to prepare for negotiations, and key terms to address. Part Two will delve into structuring the transaction, mitigating risks and liabilities, and we’ll wrap up this series in Part Three with managing the post-buyout transition, and the essential legal documentation needed.

Whether you’re in a 50/50 partnership headed for a split or one of several owners looking to exit or consolidate, this guide will help you navigate your partner buyout strategically. Let’s dive into Part One.

Every business partnership is unique, but there are common signs that it may be time to part ways with your co-owner(s). Recognizing these signs early can save your company from further harm and help you approach a buyout proactively:

Eroding Trust or Misconduct

If one partner has engaged in misconduct, such as diverting business funds or other unethical behavior, the loss of trust can make continuing together downright impossible. Discovering and documenting misdeeds like embezzlement or self-dealing are frequent catalysts for buyouts. If you’re constantly looking over your shoulder, or the accounting books, with suspicion, that is a clear red flag for an ownership change.

Poor Performance or Unequal Effort

Perhaps your partner is no longer pulling their weight. They might be working significantly fewer hours, underperforming, or showing negligence that drags down the business. If one partner is carrying most of the load while the other is coasting, resentment can build and a buyout may start to look like a way to restore balance and productivity.

Divergent Goals or Vision

Over time, business owners’ goals often evolve. You and your partner may no longer agree on the company’s direction, growth strategy, or core values. Maybe one of you wants to aggressively expand while the other is content to maintain the status quo. Perhaps one partner has developed a passion for a different industry altogether. When you and your co-owner’s respective visions for the future don’t align, splitting up the ownership could allow each of you to pursue your own path without any more conflict.

Personal Motivations

Not all buyouts stem from negativity. Sometimes a partner is simply ready to retire, move to a new city, or focus on other endeavors. If your partner has signaled a desire to exit for personal reasons, or if you yourself feel burned out by the partnership, a planned buyout can be a positive solution. The key is to approach it collaboratively so both sides feel good about the outcome.

Constant Conflict or Deadlocks

Every partnership has disagreements, but if every decision turns into a battle, the partnership may no longer be tenable. Frequent fights, lack of respect for each other’s ideas, or deadlocked votes (especially in a 50/50 ownership arrangement, which can have you wondering how to break up a 50/50 partnership almost daily) are strong indicators that continuing as-is will hurt the business. If you find that you dread meetings with your partner or nothing gets done due to stalemates, it may be time to consider an exit plan for one of you.

Any one of these signs, or a combination of them, suggests it’s wise to start exploring a partner buyout. Importantly, listen to your gut: if you constantly envision the business running better without your partner (or vice versa), that’s a sign worth heeding. Once you recognize the need to part ways, it’s time to prepare for the buyout process in a structured, professional way.

Buying out a partner isn’t an impulsive move: it requires careful prep work to protect your interests and set up a successful negotiation. Before you even propose a buyout to your partner, or respond to their offer to buy you out, consider taking these preparatory steps:

Review Your Partnership Agreements and Legal Documents

Start by pulling out any existing partnership agreement, shareholder agreement, operating agreement, or buy-sell agreement that might outline buyout procedures. Many savvy business partners plan for breakups in advance with clauses detailing how a buyout should work to address such considerations as valuation methods, first right of refusal, and so on. If you were savvy enough to have such a roadmap, follow it. 

For instance, an operating agreement might specify that if one partner wants out, a certain valuation formula or notice period applies. If no prior agreement exists, which is common for many small businesses, you’ll unfortunately need to negotiate from scratch. That lack of a prior agreement makes the other prep steps even more crucial. 

Assemble a Team of Trusted Advisors 

It’s highly advisable to consult with an experienced corporate attorney early in the buyout process. (Even better, you pursued this consultation at or soon after you formed your business to set the table for clear buyout procedures laid out in your operating agreement.) 

Even if the situation with your co-owner(s) is amicable, that attorney can outline your options and ensure you don’t overlook applicable legal requirements. Because laws pertaining to LLCs, corporations, and other business entities vary by state, involving an attorney well-versed in those laws is critical. 

In addition, strongly consider engaging a qualified financial advisor or accountant. They can help you gather up-to-date financial statements, assess the business’s fair market value, and understand the tax implications of a buyout. (Is the payout structured as a share redemption, which might have dividend tax treatment, or a sale triggering capital gains? How will it affect the company’s books? An accountant’s guidance here is key.) 

An accountant can also flag any hidden liabilities or financial issues that should be factored into the negotiations. If financing the buyout is a concern, you might even speak with a banker early to explore loan options. Essentially, have professionals in your corner to strategize with you, rather than going it alone.

Get an Independent Business Valuation

One of the trickiest parts of a partner buyout is agreeing on a price. Both sides may have very different ideas of what the business, or the departing partner’s share, is worth.

To keep negotiations objective and avoid a battle of wills, consider getting an independent valuation of the company. A professional business appraiser or CPA can analyze your financials, market conditions, assets, and liabilities to come up with a fair value. This valuation can serve as a neutral reference point in your talks.

That kind of groundwork can instill confidence that neither side is being short-changed. Even if you don’t pay for a formal appraisal, look at comparable business sales, industry multiples, or consult your accountant for her insights. Having a well-reasoned number or range in mind will make your negotiation position stronger.

Plan Your Financing and Budget

Figure out early how the buyout will be funded. Will the company pay the departing partner from its cash reserves or by taking on debt? Will you, as the remaining partner, need to get a loan to buy out your colleague’s shares?

Perhaps the exiting partner is open to a seller-financed payout, meaning that the business pays them over time, with a promissory note. A seller-financed payout is common when a lump-sum payment isn’t feasible for the buyer.

Explore options like bank loans, SBA loans, or alternative financing if needed. Each route has pros and cons: external financing costs money (read: interest) but gives a clean break, whereas seller financing keeps you entwined financially for a while longer, but may be easier to obtain.

Also consider any third-party consents that financing might involve; for example, an SBA loan might require personal guarantees or collateral. If you’ll be taking on significant debt to finance the buyout, incorporate those projections into your post-buyout business plan to ensure the company can bear it.

The worst outcome is agreeing to a price you can’t actually afford to pay. It’s better to have a frank look at your finances now than to over-promise and end up in a legal dispute later because payments can’t be met.

Know What You Want and What You Can Concede

Before you begin negotiations with your partner in earnest, outline your ideal terms and deal-breakers. What’s the maximum price you’re willing or able to pay? Would you prefer to pay in installments over 3-5 years, rather than a huge lump sum?

Are there specific assets you want to retain at all costs, or are willing to part with? For example, maybe you’re fine with your partner keeping a company vehicle as part of their payout, but you’re not okay with them keeping any rights to the company name or client list.

Think about non-monetary points too: do you need the exiting partner to stick around for a brief transition period as a consultant? Are you going to require a non-compete covenant from the exiting partner(s) so they don’t set up a rival shop across town next month?

Having a clear wish-list and fallback positions will make your negotiation more focused.

Of course, also try to anticipate what your partner will want, so you can prepare to address their concerns. For example, they might be very keen on keeping a piece of equipment or ensuring the company assumes a particular debt. Solid preparation can turn the buyout discussion from a tense showdown into a problem-solving session.

Keep Emotions in Check and Communication Open

This is more of a soft skill, and soft skills are often underrated in negotiations, though they are absolutely critical. By the time a buyout is on the table, chances are the relationship between you and your partner is strained. 

Nevertheless, approach the negotiation as professionally and calmly as possible. Maintain civility during the process even if your partner refuses to. Not only will this make negotiations smoother, it can also preserve your business’s reputation and make the transition easier for employees and customers. If talks get heated, consider bringing in a neutral third-party mediator or have the lawyers handle more of the communication to create a buffer between the partners. 

The goal is to reach a mutually acceptable deal, not to “win” a fight. It might help to frame the situation as a business problem to solve together: “How can we structure this so you get a fair price for your share and I can feasibly pay it, while keeping the business we built together healthy?” A cooperative tone can lead to a faster, better outcome than an adversarial one.

Taking these steps to prepare will put you in a strong position when you sit down at the negotiation table. You’ll know the lay of the land legally and financially, have a clear strategy, and be less likely to be caught off guard. With preparation in hand, you can move on to actually hashing out the deal terms with your partner.

When negotiating and drafting a partner buyout agreement, the devil is in the details. A well-structured deal should cover all the key terms so that there are no surprises later. Here are the major points you’ll want to address, with some pointers on each:

Purchase Price: How to Value a Partnership Buyout

Everything hinges on the price. Accordingly, specify exactly how much will be paid for the departing partner’s interest and how that number was determined. Is it a flat dollar amount, an amount to be calculated based on a formula or future performance, or subject to adjustment after due diligence? In most cases, by the time you draft an agreement, the price will be a fixed number or a formula everyone agrees on.

For transparency and fairness, you might even recite how it was determined. As a simple example of this: “Whereas the parties have agreed that the fair market value of the Company is $1 million, and 50% of that value is $500K, which represents the outgoing partner’s 50% ownership share.”

Ideally, that FMV is independently calculated, say by the valuation analysis of a CPA engaged by the partners, and the seller acknowledges in the agreement that such analysis was indeed conducted and agrees that the FMV is fair. This acknowledgement is a smart inclusion for the buyer to preempt any later argument from the seller that the price was unfair.

It’s also wise to clarify that after the closing, the selling partner has no further interest in any appreciation of the business’s value. That preempts that the partner coming back later and claiming that, “because the company sold for more a year later, I deserve more,” unless of course, you contractually gave them an earn-out. Nail down the price and be clear that it’s in full settlement of the seller transferring its ownership rights.

Payment Terms (Cash vs. Payout Over Time) 

How will the price be paid? If it’s a lump sum at closing, the agreement should indicate as such and you’ll need to line up those funds.

Often, though, small and mid-sized businesses opt for an installment payout. This can be recorded with a promissory note from the buyer. The company should enter this note, not the remaining partner. This helps avoid personal liability for the note.

Key aspects of this include the amount of any down payment, the schedule of installment payments, the interest rate (if any) on unpaid balances, and the consequences of default. As a simple example, the buyout deal might state that $100,000 is paid at closing and the remaining $500,000 will be paid over 5 years with 5% interest, via monthly payments.

If using a note, the seller will want to ensure it’s signed and perhaps personally guaranteed by the remaining partner and/or secured by collateral. The buyer will want the ability to prepay if possible and clarity on where to send payments.

Also consider: does a default accelerate the remaining balance? It usually does. All these terms should be spelled out to avoid future disputes.

If you’re the seller taking payments over time, you might ask for security, such as in the form of a secondary lien on company assets or a personal guaranty from the remaining partner. That would protect your right to be paid even if the business hits a snag. If you’re the buyer, be mindful not to overextend with a payment plan the business simply can’t sustain.

Non-Cash Consideration (Assets or Other Value) 

A buyout doesn’t have to be 100% cash. Sometimes, part of the deal may involve the departing partner keeping certain company assets or receiving other value. For example, you might let the exiting partner take ownership of a company vehicle, piece of equipment, or other property as part of their payout, all of which effectively reduces the cash needed.

If you do this, your agreement, or a separate bill of sale attached to the agreement as an exhibit, should list the assets transferred and state they are given “as-is” without warranty, with the company released from any claims or liabilities related to those assets. This is important to avoid the unfortunate scenario of your ex-partner suing you later because, say, the truck’s transmission failed after they drove off with it. You want it made clear that once they take the agreed assets, those assets are their responsibility.

Non-cash perks could also include things like the company paying off a loan that the partner personally guaranteed (more on that below) or even the company agreeing to keep the partner’s health insurance for a defined period of time. Be creative if it helps bridge a valuation gap, but document everything.

Division of Debts and Liabilities in a Partnership Buyout

Deciding who remains responsible for which liabilities is as important as dividing assets. Often, the company itself will remain responsible for its ongoing debts, such as loans and vendor payables, but what if the departing partner has personally guaranteed some of those debts?

A common example is a bank loan or credit line where both partners signed a personal guaranty.

In the buyout, will you as the buyer want to address whether the company will attempt in good faith to convince the lender to release the exiting partner from those personal guaranties?

Imagine a scenario where the seller is co-guarantor with the remaining partner on two SBA loans and the seller wants the contract to state that she wishes to be removed as guarantor and that the company will make good faith efforts to obtain that removal.

If the buyer agrees to such language, she will want to make clear that, if the lender refuses, the company isn’t in breach of the agreement for failing to get the release since the bank and/or SBA decides that ultimately.

This is a realistic approach; you can’t force a bank to redo a loan, but you can agree on trying. If you’re the exiting partner, you’d certainly want to be free of those obligations moving forward, or at least have an indemnity (i.e., promise to be repaid) if you ever get stuck paying the company’s debt after you’ve long ago rode off into the sunset.

Other liabilities to sort out include credit card guarantees, lease obligations that list the existing partner in her personal capacity either as a guarantor or a co-tenant, pending lawsuits or potential claims, and tax liabilities.

How much tax do you pay on a buyout? Just to touch on post-buyout tax liabilities, if the company is a partnership or LLC, typically the departing member would still pay income tax on their share of profits up to the sale date, but after that they should not be responsible for future taxes of the company.

The cleaner you address each liability, the less finger-pointing later. Often the agreement will have each party represent that they have not incurred any undisclosed debts or obligations on behalf of the business that the other might suddenly get hit with.

Transition Period and Role of Departing Partner

Decide if the partner who’s leaving will have any ongoing role during a transition, and if so, for how long and under what terms. Sometimes, especially if the departing partner managed key client relationships or a critical operation, the remaining owner might want a short consulting arrangement to ensure a smooth hand-off.

For example, the partners may agree for the exiting partner to remain available as an at-will employee or consultant through the end of the year, continuing to draw his salary, at the company’s request. However, the company can make clear that, while it was obligated to pay his salary, it wasn’t obligated to actually use him. Not every buyout will include this; many times the partner leaves immediately and that’s that.

So consider your situation: so you need a few weeks or months of your exiting partner’s cooperation to train someone else or transition relationships? If so, outline the expectations when it comes to duties, compensation, timeframe, and so on. Conversely, if you don’t want them involved at all post-closing, ensure the agreement stipulates that they resign from all positions effective at closing and do not continue to hold themselves out as part of the business. Speaking of which…

Resignations and Removal from Offices

The buyout agreement should have the departing partner formally resign from any and all roles she held in the company, whether officer, director, or otherwise. You’ll want a letter of resignation at closing. For a corporation, that means if they’re on the board of directors or are an officer, they step down. In an LLC, if they’re the managing member or on the managing board, the same applies. This is important not just for clarity but for legal purposes; you don’t want a former partner still having legal authority to act for the company. Post-closing, make sure to update official records like corporate minutes and state filings to reflect the change in management.

Non-Compete and Non-Solicitation Agreement

Most buyers will want some assurance that the departing partner doesn’t set up a competing shop down the street and lure away clients or employees immediately after the buyout. Thus, a non-compete clause is often a key term to a buyout agreement.

Generally speaking without getting into the particulars applying to a given state’s statutory and case laws on this subject, these clauses must be reasonable in scope to be enforceable. As such, they typically limit the departing partner from engaging in the same type of business in a certain geographic area for a certain period of time.

Tailor the non-compete to your scenario by considering the business type, region, and what would truly harm the company. In addition, include a non-solicitation clause to prevent the ex-partner from poaching the company’s employees or contractors for that same period, and from soliciting the company’s customers or vendors.

Non-solicitation is often as important as non-compete, because even if they don’t start a new business, you don’t want them recruiting your star salesperson to their new venture or taking key clients’ business away. Ensure these clauses have a reasonable duration and territory so they are enforceable under your state’s law and note that California business attorneys will caution that non-competes are largely unenforceable in California except in very narrow circumstances. If you’re the one leaving, understand these restrictions and negotiate effectively before you sign because they can affect your livelihood.

Confidentiality and Non-Disparagement

It’s wise to have mutual promises that neither party will spill confidential business information or speak badly of the other after the split. You might both agree to keep the details of the buyout and the company’s sensitive information private, while also agreeing to refrain from disparaging each other to clients or in public. The last thing you want after a hard-fought buyout is your ex-partner bad-mouthing your business to everyone in the industry, and vice versa. These clauses protect the company’s goodwill and each individual’s reputation. They should be reasonable and allow for any disclosures required by law or to one’s professional advisors, but generally they remind everyone to exit gracefully.

Spousal Consent (if Applicable) 

If your partner (or you) is married, consider whether the spouse has any legal interest in the business that needs to be addressed. In community property states like Texas and California, a spouse might have a community property interest in a business owned during the marriage. To avoid any future claim by the spouse (e.g., “I never agreed to sell those shares!”), it’s common to obtain written spousal consent to the buyout agreement. This is basically the spouse acknowledging the deal and waiving any rights to the interest being sold. This extra step creates certainty that the transferred shares or interest won’t later be subject to a divorce dispute or claim of “I didn’t sign off.” Even outside community property states, if a spouse is involved in the business or on the official records, you may want them to sign off. Coordinate with your attorney on this point because it’s a small, but important detail in many partner buyouts.

Representations and Warranties

In larger buy-sell deals, you’ll see detailed reps and warranties from both sides (similar to when selling an entire business). For a partner buyout among small business co-owners, the reps/warranties section is usually more straightforward but still important.

The exiting partner should represent that they have the authority to sell (i.e., no other approvals needed, and they haven’t pledged their ownership interest as collateral to someone else), that the information they’ve provided is accurate, and that there are no undisclosed liabilities or legal issues that could affect the company. The buying party (company or remaining owner) might represent that they have authority to enter the agreement and the financial ability to perform.

Essentially, each side assures the other that they aren’t aware of any bombs waiting to explode. For example, you’d want your partner to promise they didn’t secretly sign a contract obligating the business to something huge without telling you, or that there isn’t a tax lien on their shares, etc. These statements, if false, give you recourse later (e.g., you could sue for breach of warranty or seek indemnification).

Indemnification and Releases 

To further allocate risk, buyout agreements often include indemnification clauses. This means each side agrees to reimburse the other if certain breaches or claims arise after the deal. For instance, if after the buyout, the company gets sued for something that was the departing partner’s fault, or was related to their time in control, the departing partner might indemnify the company for those losses. 

Indemnity clauses can get technical, but their goal is to ensure a clean break, such that each party is responsible for her own promises and prior actions. Alongside indemnity, consider a general release of claims if the situation warrants. This is basically where each party says “I release you from any legal claims up to now.” A release can prevent the exiting partner from later suing the company for something or the company suing the exiting partner, except to enforce the buyout agreement itself. 

If the relationship had serious disputes or there are known issues, a mutual release can be very valuable to ensure that both sides agree not to look for reasons to sue each other once the deal is done. 

Note, however, that releases typically don’t cover unknown fraud or things of that nature unless explicitly stated. In any event, discussing indemnities and releases with your attorney is important to truly resolve all outstanding issues.

Closing Deliverables and Logistics

Finally, the agreement should spell out how and when the deal closes and what each side must deliver at that time. A well-drafted buyout agreement will list the closing date, or how it will be determined, and the documents to be exchanged at closing. For example: the selling partner will deliver their signed resignation letters, their stock certificates or LLC membership certificates properly endorsed for transfer, any required third-party consents, such as spouse consent, landlord consent, and so on, and perhaps a signed release or other exhibits.

The buying party, concurrently, will deliver the payment (or first payment if it’s an installment), the signed promissory note, signed board resolutions approving the deal, and so on.

Think of it like a checklist such that everything needed to effect the change in ownership should be handed over simultaneously. If the closing is contingent on something, such as financing approval or a third-party consent, that should be noted as well.

You want clarity that, “once we’ve all signed and exchanged these items on the closing date, the deal is done.” After closing, the agreement may require further actions like updating government filings or bank accounts, which are sometimes captured under a “further assurances” clause obligating parties to cooperate with any post-closing paperwork.

All the above is undoubtedly a ton of details. Partner buyout agreements can be lengthy, but covering all these bases is what ensures a clean break and a smooth transition. By addressing price, payment, assets, debts, roles, restrictive covenants, consents, and legal assurances, you and your partner will have a comprehensive roadmap for the separation.

In Part Two, we will move from planning and paper to action: how to structure the buyout transaction accordingly to properly execute the deal, strategies for addressing risks and liabilities during and after the buyout, ensuring a seamless transition once your partner exits, and a recap of all the legal documents you’ll need to finalize. We’ll also discuss how involving the right professionals, like a skilled corporate transactional attorney and  financial advisor, can make the execution phase far less daunting. 

 

This publication is provided by Amini & Conant, LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. Should the reader seek further analysis of the subject matter or answers to specific questions about the subject matter, please contact the author at joel@aminiconant.com. This publication is considered advertising under applicable state laws.

 

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