May 31, 2020  
 
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Business Advice for Bad Economic Times

 

Buying Out Your Business Partner

Written by Jay Shapiro for Gaebler Ventures

The recent financial downturn was responsible for many a union changing from one that was good to one fraught with tensions. But its aftermath may also have given buy out partners more leverage to buy partners out at reasonable cost.

Sometimes even the healthiest of business partnerships can, like personal ones, be affected by stresses and strains. External pressures such as turbulence in the economy can highlight incompatibility issues in partnerships.

These may not have been present before, because it's easy to get along and see eye to eye with most people when times are good. Throw some harsh challenges into the mix and relations can get strained.

When such pressures exist business partners, unless they are a perfect fit, can quickly grow apart. Each will have his or her own idea of how best to keep the company afloat in the short term. These notions may even stretch as far as wanting to go it alone, in the interests of smooth operations and one less senior member's salary to consider.

It is often when they are faced with a major dilemma, like the impact of the credit crunch, that partners start to notice that they have different visions for the future of the company. If there is an imbalance in terms of how much effort is put in by each member, the more dedicated partner will, understandably, feel reluctant to carry his counterpart.

Economic issues are just one reason partnerships come under strain, but there are other causes, it might just be that the connection between the two people is no longer as strong as it was. This can happen in emotional partnerships too, as we know. Separations of any kinds aren't easy and the business separation or divorce can be a traumatic.

But won't getting shot of an unwanted business partner cost you?

Yes, there will be costs associated with doing so, but one advantage that the crunch brought with it is that of lowering business valuations. Therefore the buy-out sum associated with a struggling company will be considerably less that it would have been when the firm was more buoyant.

Minority partners can actually be bought out without their consent. How this plays out Depends on the business entity and the state of incorporation. The controlling owner, however, might be able to oust the other party via a merger, a share exchange, a reverse stock split, or redemption. Where there is a shareholder's agreement, an LLC operating agreement, a partnership agreement or alternative 'pre-nuptial' style contract between the partners that may necessitate a buy-out at once the non-controlling partner's employment contract is terminated.

Some pre nuptial agreements prohibit or impede the controlling owner's right to enforce a buy-out. Other methods that are viewed as oppressing the non-controlling partner may be allowed. The reason this kind of oppression of the other partner might be justified is:

  • It is seen as acceptable for management to trim down or do away with dividends or distributions, reduce salaries and other compensations. These actions may be beneficial to the company while inducing any non-controlling partner to yield to the controlling owner's wish to buy.

In addition, if any declines stocks or realty values cause the non-controlling partner a cash squeeze, this can afford the controlling owner even more power to negotiate.

Jay Shapiro is a freelance writer based in the UK. Jay has a particular interest in the emotive aspects of the entrepreneur's character. "Alongside the nuts and bolts of business, the character of the person is often the ingredient responsible for success."

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