How To Buyout A Business Partner (Part 3)

Closing the deal is only the beginning. In this final installment of our series “How to Buyout a Business Partner,” we focus on what happens after the papers are signed. In Part One we talked about the prep work that goes into a buyout, while Part Two discussed the transaction itself. 

In this final article we will discuss the aftermath of your buyout, including managing the post-buyout transition, updating operations, securing key relationships, and finalizing legal documentation. This guide walks you through every step to ensure your business continues to thrive. If you’ve completed, or are about to complete, a partner buyout, these strategies will help you protect your investment and set the stage for long-term success.

The buyout deal is signed and you’re officially moving forward without your former partner. Congratulations! Now the real work begins to integrate the changes into your day-to-day operations and lead the company either solo or with a new team. A well-managed transition period will ensure the business doesn’t miss a beat. Here are some key post-buyout transition steps:

Update Organizational Roles and Responsibilities

With one less person at the helm, you’ll need to redistribute the tasks and responsibilities your partner used to handle. Start by identifying the gaps. For instance, if your partner oversaw sales and you handled operations, who will handle sales now? You might take on some critical relationships personally, and perhaps delegate others to a senior employee or new hire.

Make sure everyone on your team knows about the change in leadership and understands any new reporting lines or duties. It can be useful to hold a team meeting soon after the buyout is finalized to communicate these changes and rally the team.

If the partner’s departure means promotion opportunities for others, announce those promptly in order to turn a potentially anxious time for staff into a motivating one for them. By clearly filling the partner’s shoes with either yourself or others, you avoid operational drift.

Administrative and Account Changes

As part of the immediate aftermath, take care of all the little things that need changing, however monotonous they may be. This includes such logistics as changing signatories on all bank accounts, updating the registered agent or contact person for the company if your partner was listed, changing passwords and user accounts for any software or services that the partner had access to, and updating company directories, website, or marketing materials if the partner was featured there (you don’t want clients emailing a now-defunct address).

If your partner was the point of contact for certain vendors or clients, send out notifications to those parties indicating the new contact person. Essentially, remove the partner’s name from the official fabric of the business in all respects.

Many of these are housekeeping tasks that your corporate attorney or operations manager can help list out. Create a simple checklist and knock them out one by one.

Integrate Financial Changes

After the buyout, the company’s finances might look different. For instance, perhaps you took on debt to finance the buyout, or you’ll be making regular payments to the former partner. Adjust your financial planning and budgets accordingly.

If a chunk of cash went out the door for a lump-sum payout, make sure you have a revised cash flow projection to manage the next few months. If you’re servicing a new loan or note, incorporate that into your monthly expense planning. It’s wise to meet with your accountant during buyout negotiations and shortly after the deal closes to align on these changes.

Also, update any equity records: if it’s a corporation, record the cancellation or transfer of shares in the stock ledger. If it’s an LLC, amend the membership ledger and possibly the operating agreement to reflect the new ownership percentage. This is part of not just legal compliance, but also financial compliance to ensure that future distributions or tax allocations reflect the new ownership from the day after closing onward.

Don’t forget taxes: if the buyout happened mid-year, for a partnership or LLC taxed as a partnership, you may need to allocate profits and losses up to that date for the departing partner’s final K-1. For an S-corporation, similar allocation might be required unless you use specific closing-of-books elections. These are technical matters that you ought to coordinate with your CPA so that the departing partner gets her correct share of any profits or losses up to the sale date, and not after. 

Future Governance and Agreements

Now that the dust has settled, take a moment when you have the bandwidth to improve your foundation going forward. If your business will continue with multiple owners, strongly consider drafting or updating a buy-sell agreement or partnership agreement among the remaining owners to handle future buyout situations. We often learn from experience: if this partner-exit was rocky because no pre-existing agreement guided it, you can fix that for the future.

Put in place clear terms for what happens if one of the remaining partners wants out down the line so next time the exit is smoother. If you’re now the sole owner, you’re rewarded with far simpler governance, but you might still update things nevertheless. For a corporation, you might treat it like a closely-held corporation allowing you to reduce corporate formalities, such as reducing the board of directors to just you as the sole shareholder.

If you had an LLC with 50/50 ownership and now you’re 100%, update the operating agreement to note that. Ensuring your legal documents reflect the new reality will help avoid confusion. Also, consider estate planning. If something happens to you as the sole owner, what is the plan? It might be wise to get a succession plan or at least a will or trust in place to handle the business. It’s a tangent, but one worth noting as part of a forward-looking transition.

Monitor and Celebrate

Lastly, keep an eye on the business’s performance post-buyout. Sometimes buyouts come with a period of financial tightening due to loan payments or loss of a rainmaker partner. Monitor your key metrics closely to catch any slump and respond quickly. On the flip side, don’t forget to celebrate the successful transition. You’ve navigated a major change, which is no small feat. So take pride in the new chapter you’ve embarked on. Many business owners find a renewed energy and sense of purpose after a buyout, even if it’s tinged with the loss of a partnership.

Embrace the positives: maybe the decision-making is easier now, or you can pursue strategies you couldn’t before. A smooth post-buyout transition is all about communication, updates, and forward-planning. By taking care of people, paperwork, and plans, you’ll turn what could be a chaotic time into just another step in your business’s evolution.

We’ve mentioned a lot of documents throughout this three-part guide. To bring it all together, here’s a handy checklist of legal documents you’ll likely need in a partner buyout, and what each is for:

Buyout Agreement (Stock Redemption Agreement / Purchase Agreement)

This is the main contract between the buying party and selling partner. It contains all the terms we discussed, such as purchase price, payment terms, reps and warranties, covenants, closing conditions. This is the central document that everything else feeds into. It may have various exhibits attached thereto for certain ancillary agreements or documents. 

Promissory Note

If any portion of the price is being paid over time, a signed promissory note from the debtor, whether the company or an individual remaining partner, to the seller will detail the payment plan and interest. Make sure the terms of the note are consistent with what the main agreement says, and addresses defaults, acceleration, governing law, and jurisdiction.

Security Agreement / UCC-1 Filing

If the seller is getting a security interest in any assets to secure the note, a security agreement will describe the collateral and the terms. A UCC-1 financing statement, filed at closing or immediately after, with the applicable U.S. state might be prepared to put third parties on notice of the seller’s lien. Without going into deep legalese, know that this is how a seller can “mortgage” the business assets as backup for payment.

Bill of Sale for Assets

If you are transferring any tangible assets, such as equipment and/or vehicles, to the departing partner as part of the deal, a bill of sale document will formally effectuate that transfer. It usually is a short document listing the assets and stating transfer of ownership for value received, often including that “as-is” language and release of liability. Have the partner sign an acceptance line if possible, acknowledging they’re taking the items as-is.

Assignment of Membership Interest (for LLC) or Stock Powers

If your entity is an LLC, typically the departing member will sign an Assignment of Membership Interest form, which is sometimes attached as an exhibit. This document, often notarized, evidences that they transfer their LLC interest to the buyer—be it the company or other owner—effective the closing date. For corporations, if physical stock certificates exist, the seller should endorse the certificates or provide signed stock power forms that are standardized forms to transfer stock. Essentially, ensure there’s a paper trail that the ownership units have been transferred.

Resolutions/Consents

To comply with corporate governance, prepare any corporate resolutions required by your operating agreement(s). For a corporation, a Board of Directors resolution or unanimous written consent authorizing the stock redemption or sale is typically required. If shareholders beyond the partners are involved, shareholder approval might be needed too.

For LLCs, a written consent of the members or managers approving the transaction might be appropriate. Since in many small businesses, the partners are the board or sole members, this may feel like an excessive formality, but it’s good practice to paper that consent. Plus, third parties like a bank or escrow company might ask for a certified resolution stating, for example, “Resolved that the Company is authorized to purchase Jack’s 50% interest for $X and that ACME Company is authorized to execute all documents…” If you’re the sole remaining owner, you might be signing on behalf of the company now, but the departing partner would sign to approve the deal from the company side because she is still officially a director or member pre-closing. 

Resignation Letters

As discussed in Part One, have prepared letters of resignation for the departing partner to sign, to memorialize that she is stepping down from all official roles. You might need separate letters if they held multiple offices, such as serving as both Director and President. The wording should include an effective date—usually the closing date—and a line for them to sign. It can be addressed to the Board or to the company. Get these in hand at closing so you can confidently represent to others that they are no longer an officer and/or director.

Spousal Consent Form

If the selling partner is married, have her spouse sign a Spousal Consent form after allowing the spouse to review the to-be-executed copy of the buyout agreement. This form will reference the main agreement and affirm the spouse’s agreement and consent to the transaction, waiving any marital property rights. This document often needs to be notarized because it can be important legal evidence if disputes arise later. Make sure it’s drafted in accordance with your state’s laws for waiving marital rights. For example, because Texas and California have community property laws, the language should clearly relinquish any community interest in the business shares being sold.

Non-Compete/Non-Solicit Agreement

If the purchase agreement doesn’t itself contain the full text of the non-compete and non-solicit provisions—sometimes they do within the covenants section—you might have a separate Non-Competition and Non-Solicitation Agreement for the seller to sign at closing. Having it separate can be useful for emphasis and enforcement, given that you could show just that agreement to a court without all the financial terms of the main deal. Be sure it’s consistent with the main agreement’s covenants if both exist. 

Consulting or Employment Agreement (if any) 

If the departing partner will provide services post-closing, even temporarily, draft a short Consulting Agreement or Transition Services Agreement outlining the scope and payment. For example, “Seller will be available up to 10 hours a week for 8 weeks to assist in transition, for $X per week,” or whatever terms you agreed to. In many cases, a separate agreement is cleaner so both sides know the exact terms. You might include a non-compete reiteration in it and a work-made-for-hire clause if the departing partner will produce any materials. If no such role is planned, then this agreement isn’t needed.

Mutual Release Agreement

If you decided to do a mutual release of claims, that could be a separate document both parties sign at closing. This would say each releases the other, and perhaps the company releases the seller and vice versa, from any claims arising before the closing date, known or unknown (with appropriate state-specific waivers, like a California Civil Code 1542 waiver if applicable for unknown claims). The wording needs to be carefully done to ensure you’re not releasing obligations under the buyout itself or ongoing obligations.

For example, you’re obviously not releasing the departing partner from their non-compete promise or promissory note payments). Sometimes this is rolled into the main agreement, but a standalone mutual release is common if there were potential disputes. Work with legal counsel on this if there’s any gray area of past liability. This mutual release is like insurance you hope you never need to use, but that gives you peace of mind to have.

Government Filings

While not exactly “documents” of the deal between you and your partner, don’t forget any official government filings. For instance, if you’re a corporation in a state that requires officers and directors to be listed in annual reports, you may need to file an amendment or update to remove the old partner’s name at the next filing. If your LLC’s management or membership is on record with the state, update that. Some states let you reflect changes in your annual report, while others you might file an interim change notice.

Dissolve any fictitious business name filings that included the partner’s name, or update them, as applicable. If the partner was the qualifier for a license, such as a contractor’s license, file the necessary paperwork with the licensing board to substitute the qualifier. Finally, when it comes to taxes, if the partner was listed as a responsible party with the IRS or state tax agency, which is common in small companies for payroll taxes, submit a change of responsible party form. This is all part of cleaning the slate so that legally, the world knows that person is no longer associated with your business.

Organizing these documents may seem daunting, but with a good attorney’s help, they will have a closing checklist and prepare most of them for you. Your job is to review and understand them, and execute where needed. When all the paperwork is signed and delivered, store digital copies securely. With everything documented and filed, you’ve essentially future-proofed your buyout, reducing the likelihood of legal missteps and providing clarity to all involved about who owns what and who can do what going forward.

Buying out a business partner is a significant milestone for any entrepreneur. It marks the end of one chapter of co-ownership and the beginning of another, whether that’s sole ownership or a new partnership structure. We’ve covered a lot of ground in this two-part series, from the early signs of needing a buyout and preparation to carry it out in Part One, to the nitty-gritty of deal structure, risk mitigation, transition, and documentation in Part Two. By now, we hope you appreciate that a partner buyout is both a legal transaction and a human process. As such, it requires attention to contracts and laws, but also tact, planning, and leadership.

We will leave you with a few final pieces of advice. Essentially, plan for the worst, but expect the best. By addressing all the legal and practical considerations, you set yourself up for the best possible outcome: a smooth, drama-free transition where everyone gets a fair deal and the business is positioned to thrive afterward. Also, don’t hesitate to seek professional guidance in this process.

We’ve emphasized involving a business attorney, and that’s not just a (shameless) plug. We emphasize this because an experienced and conscientious lawyer can foresee issues you might miss, ensure your agreement is solid, and negotiate tough points on your behalf. Similarly, financial and tax advisors can optimize the deal for you. Yes, there’s a cost to these services, but think of it as an investment in avoiding costly mistakes or litigation later.

If you’re reading this because you’re considering or embarking on a partner buyout, know that you don’t have to navigate it alone. Our Austin law firm has guided many business owners through partner “business divorces” and ownership changes. We understand the challenges and emotions involved and we strive to make the process as smooth and straightforward as possible for you. Among many other corporate legal specializations, we help small and mid-sized businesses successfully execute business partner payouts and transitions, keeping your interests protected every step of the way. Contact our business law firm to discuss the potential for representing you or your company on a partner buyout. We can help you turn a potentially stressful ordeal into a manageable process and set your business on course for a successful, well-governed future with you at the helm.

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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