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Different Options for Buying Out a Business Partner

written by: Ivy N. McQuain MBA•edited by: Linda Richter•updated: 9/8/2010

When your business partner and you have reached a point of discontentment or possess the inability to move in the same direction then you need to understand the different options for buying out a business partner before moving forward.

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    Shake Hand Image by JSCreationzs on FreeDigitalPhotos.net 

    Being a business owner may be one of the most daunting tasks an individual may encounter; couple starting a business with someone else and the abilities for success double as well as the problems. Sadly, there are some business owners who reach a point where they are unable to continue to move forward in a cohesive manner and decide to dissolve the business. There are many reasons why business partners decide to call it quits. These reasons range from being incompatible to moving toward a new business or personal direction. The reasons are limitless.

    Unfortunately some business partners fail to actively and responsibly end their business agreement because of a lack of knowledge. Here are some different options on buying out a business partner and the positive and negatives for each option.

    1. Complete business buyout option. Buying out your business partner entirely may be one of the most beneficial options for you as part business owner of your company. When you decide to buy out your business partner completely you will be able to totally dissolve your partner’s interest without additional payouts or considerations. A complete buyout requires full agreement and consent from your partner and should include the advice of your lawyer and accountant to ensure you are not taking on unreported debt. Once the complete business buyout option is executed, then all business decisions, liabilities, profits, and issues become your responsibility. While you no longer have to wait on or postpone pertinent decisions you will have complete control of your business and all the issues which can result from full ownership.

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      2. A majority control business buyout option. If you are willing to allow your business partner to retain some earnings and maybe even some decision making rights, then the majority control business buyout option allows you to take majority control of the business while your partner retains a lesser percent of control. When establishing a majority control business buyout option you agree to the terms which allow you the majority of control of the business. You are also the primary earner of the business which is beneficial. Unfortunately, a majority control business buyout option still entitles your business partner to possibly make decisions but does allow your business partner to retain earnings. You should consult your attorney and accountant for the splitting of the business.

      3. Minimal vested interest buyout option. If your partner wants to retain earnings from the business then offer him the option to receive dividends at a set percentage without the option to increase. Paying a dividend to your partner may prove beneficial if you later need to retain capital from an investor. Offering your business partner a minimal vested interest buyout option will give you full decision-making rights and give you control of the business while your partner retains some earning rights. With this option your partner earns profits while you do all of the work. You should consult with your accountant to ensure you are offering the right percentage of profit for your partner.

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        Buying out your business partner is one of the most beneficial options if you and your business partner are experiencing relationship difficulties or have come to a moment in your company when working together is no longer an option. Whatever the reason, you should always consult your attorney and accountant to ensure you understand the following:

        - The structure of your business (Limited Liability Corporation, partnership or s-corporation) and the necessary steps for re-filing your business structure.

        - Signing mutual release and business release liability agreements which outline the dissolution agreement.

        Once you take the small steps to buy out your business partner and restructure your business, you are on your way to becoming an individual business owner. Good luck!

        Image Credit:

        FreeDigitalPhotos.net, shaking hands, by jscreationz