One common way to sell your business internally is to an existing partner. There are obvious advantages to this method since your partner possesses intimate knowledge of the business and there would be little disruption for the current employees. It can also provide for a continuation of your legacy and a smoother transition than other options. However, there are still things you need to consider about this transfer option.
What is your partner’s time line?
Many times, each partner assumes the other will be the transition solution, but neither has ever had this all-important conversation about transfer of ownership. The truth is your partner may be planning his or her own transition away from the business, especially if you both are similar in age. Even in cases where there is a difference in age, your partner may not wish to stay with the business once you leave. You may have started the business together, and your partner may feel that when you leave he or she will also. There are unique synergies in a partnership, and your partner may not be interested in going it alone. Most likely, you have different skill sets necessary for the operation of the company, and your partner may not possess your skills or be able to fill that void within the company. He or she may also be waiting to pursue other interests once you are ready to leave the business. While these conversations can be difficult, you need to have them.
Where will the funds come from?
This is not an issue unique to a partner buyout but merits mentioning here. If there has been a lack of sufficient financial planning, funds may not be available to purchase your partnership shares outright. Therefore, an earn-out, owner finance, or third-party financing may be required to fund your transaction. In addition, an internal sale option may not allow you to have immediate liquidity but will most likely be paid out over several years.
What about the sale price and taxes?
Taxes can dramatically reduce your net proceeds from any sale, even in an owner-financed scenario. Fortunately, there are strategies that can be used to minimize the tax burden, but require time and planning. How do you determine the sale price? Do you have a buy/sell agreement in place? Is it up-to-date? Most buy/sell agreements specify how the sale price will be calculated under different circumstances. Be sure you understand the details of this very important agreement. If you don’t have a buy/sell, your selling price will most likely be negotiated.
What is your contingency plan?
Having a partner can give you a false sense of security. Partners generally rely on each other, and the disability, illness, or untimely death of a partner can damage the business and eliminate your internal sale option. If you are planning your transition to be your partner and he or she is no longer willing, able, or capable to buy you out, what do you do? In our book, Cashing Out of Your Business, Your Last Great Deal, we discuss in more detail the necessity and importance of adequate contingency planning.
This internal sale option requires all partners to be involved and considered in the transition planning process for it to be successful. A comprehensive approach that independently considers each partner’s goals and objectives in an open and honest process is needed, along with ample time. Allowing sufficient time for developing and implementing a transition plan is often overlooked in a partner buyout. The familiarity with your current situation can result in complacency and an unrealistic sense of security, which can result in a less than beneficial outcome. Plan, plan, and plan some more, and don’t wait until it is too late.