Partners decide to leave businesses for a variety of reasons. In some cases, their departure was always part of the plan and was built into the original business agreement. In other scenarios, they are leaving due to a dispute, and there are plenty of reasons that fall in between. One way or another, the disassociation will have a significant financial impact on the organization. Business valuation and the buyout process are just a few of the elements that need to be considered, and how easily they are addressed is often dependent on whether disputes or animosity are driving the partner’s departure.
The primary financial decisions that need to be made surround how the disassociating partner will be paid for their share of the business. To reach this decision there needs to be agreement on the valuation method, the structure of the buyout, and how to fund the buyout.
- Options for the valuation method include an asset-based valuation, an earnings-based valuation, or a market-based valuation.
- Options for the structure of the buyout include whether to pay the departing partner with a lump sum payment or an installment plan.
- Options for funding the buyout include business savings or retained earnings, a loan from a bank or other financial institution, or buy-sell insurance policies designed to cover the buyout in the event of death, disability, or other triggering events.
Other considerations include the disposition and valuation of intellectual property and goodwill, as well as existing contracts.
Unfortunately, reaching accord on all these decisions is often the most challenging aspect of disassociation. The best way to avoid disputes is to have terms in place in the business agreement long before any animosity or adversity has arisen. Without a well-drafted agreement between the parties, the other decision that will need to be made is how best to manage disputes. Options include mediation or arbitration, the use of an expert appraiser for valuation, or failing all other solutions, litigation.
If you need assistance with crafting a partnership agreement or with navigating the challenges of a partner’s departure, Law Offices of George W Bodenger LLC can help.