A buyout of your business partner doesn’t need to end in tears for either party. If the process to buyout your business partner is done poorly the business will ultimately suffer and then everyone loses. You both started the business with the best intentions, joined at the hip with a similar vision and drive. Over time people change, circumstances change, the business is bigger and different, and roles and responsibilities have simply changed. You and your business partner are no longer aligned.
Here are 8 steps that could help a less stressful transition.
1. Discuss the present and the future. Sit down outside of the office and talk about the business with your business partner. Each of you talk about how you both feel it is currently going. Use a strengths and weaknesses framework if it helps. Then the future. What are the opportunities and threats and how are you seizing or mitigating them accordingly? Find parallels in what you are both thinking and where you diverge. It should start to become clear where you are no longer both on the same page.
2. Suggest it is time to go out on your own. There are several ways to do this. If you have created IP or a product you could agree to both use it separately. Where you have multiple products, you could split them. Of course, where one party no longer has the same drive or appetite then a buyout seems more likely. This doesn’t necessarily mean buying out all the equity as they might want to take some cash off the table and collect dividends from a lesser equity holding.
3. Value and Control. If your partner is selling all their equity, the question of value is the key item at this stage that matters. If they are selling down part of their equity, control over key decisions will also need to be considered. For example, they will need certain decisions such as future dilution of equity in return for investment to be approved by them in addition to you selling your equity to other parties. You equally need to be prepared that you may lose some control over key decisions.
Value is always a difficult topic. While there are several valuation methods and for larger organisations especially those with substantial assets, perhaps you should get an independent valuation at this stage. However, if it is largely a services business then a multiple of profits might be a simpler way to go about this. For smaller business with little demonstrated growth, multiples around 2 to 2.5 times net profit are appropriate. For larger businesses this pushes more to 3 to 3.5 times net profit. The larger you are and the more dynamic your growth the larger the multiple. It is worthwhile remembering and reminding your business partner you are not a public company so public company multiples do not apply.
4. Normalised Financials. With one partner no longer in the business you may need to adjust the financials to reflect the differences. No salary, no car, less travel or different staff. Your CFO or part-time CFO will be able to assist with this.
5. Put together your own Business Plan. With your business partner no longer in the business, work out what plans you want to implement and how much they will cost. Your CFO or part-time CFO can assist. Remember strategy before structure. If you don’t know where you are going, any path will get you there! Usually less profitably.
6. Fund the buyout. If your business partner is accepting, stagger the payment preferably over several years so it can be paid out of future profits. Most owners will want to take the payment upfront – if they are not going to be involved in the business, they want their money. Getting bank funding can be a little challenging as you are not using the funds to grow the business but to pay out a debt. Before you approach the banks and other funders, get your CFO or strategic part-time CFO to put together a pack of information that can be used to justify the loan. This will include the updated business plans and related forecasts including cash flow forecasts. Ensure you know exactly how much you need to both pay out your partner and as working capital prior to approaching any funders. Remember, there are many fund providers out there, not just the banks.
Should you and your part-time CFO (having a senior part-time CFO as part of the approach can help de-risk the loan) not be able to raise quite as much as you need, you could go back to your partner and modify the payment terms. Don’t leave the business short of working capital.
7. Independent Legals. Once you have the broad structure of the buyout deal your lawyer will need to tie up all the other lose ends to make it official.
8. Sign and start the next stage of your business journey.
Should you need assistance with business planning, forecasting including 3-way forecasting to cash, putting together information packs for funders and working with various funders to help you secure a loan, CFO Evolve’s highly strategic part-time CFOs would be happy to assist evolve your business to the next level.
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