When one partner buys out the other in a business, several issues can arise. Here are the most common ones:
- Valuation Dispute
- Determining the fair market value of the business can be contentious
- Different valuation methods (asset-based, income-based, market comparison) may lead to disagreements
- The buying partner may struggle to secure funding
- If external financing is used, debt obligations can strain the business
- Payment terms (lump sum vs. installment) must be negotiated
- Legal and Contractual Issues
- The shareholder agreement may not clearly define buyout terms. Conversely, the valuation provisions may not reflect the current metrics of the business
- Non-compete and confidentiality clauses need to be addressed
- Liabilities, guarantees, and pending obligations must be transferred correctly
- Dispute resolutions, such as right of first refusal, may not be clearly stated
- Tax Implications
- A poorly structured buyout could lead to unnecessary capital gains or income taxes
- The structure (stock vs. asset sale) affects taxation for both parties
- How does life insurance impact the resolution?
- Operational Transition
- The departing partner may have critical relationships or knowledge
- Customers, employees, and suppliers may react negatively to the change
- If the remaining partner is more essential to operations, how does this affect the buyout value and terms?