In our last installment, we discussed Letters of Intent, in the context of selling your closely-held business to an outside buyer.

This week, we look at a different type of sale. If your business is a partnership, selling to your existing partner(s) can be one of the simplest methods of transferring your interest. Your partner(s) know the business and what it needs to grow and thrive, they have established relationships with your team, and they are already invested – financially and emotionally. In many ways, this can be a near-ideal exit for you – if your partners are willing and able to take over the business and buy your interest, and – big if – you have laid the groundwork properly and effectively.

That groundwork should include:

• A Buy-Sell Agreement between you and your partners
• A vision for the future of your business
• A plan to make that vision reality
• A strategy to implement that plan
• Making sure all partners are familiar with every aspect of the business, to ensure it operates at peak efficiency

In addition, while timing of any type of sale of business interest is important, its principal impact on the sale of your partnership interest to partner(s) may be:

• The valuation of your partnership interest;
• The ability of your partner(s) to purchase that interest; and
• How the purchase will be financed.

It’s a good idea to determine whether you will sell, eventually, to your partner(s), or they to you, before the need or desire to exit your business arises, and plan for that scenario.

The first step would be for you and your partner(s) to enter into a Buy-Sell Agreement, spelling out – again, well in advance – what happens to the partnership in the case of:

One or more partner’s exiting the business, whether voluntarily or out of necessity;

• Disability of a partner;
• Death of a partner; or
• Divorce of a partner.

Any of the above can have a significant impact on any business, and, ideally, the Buy-Sell Agreement should be entered into upon the creation of the partnership, not when the issue of a potential sale arises.

Your Buy-Sell Agreement should also cover:

• Strategies for dealing with the above scenarios;
• An objective valuation of the business, and the timing (e.g., every 12 to 24 months), process and methodology for updating that valuation;
• Partners’ first right of refusal, the process for partners to opt out of purchase, and what that might mean for the future of the partnership when one partner wants to sell.
• How any sale of one partner’s interest to another, or others, is to be financed – insurance proceeds? Note payable (this is the most common method)? Business loan?
• If the sale is to be financed via note, the interest payable and the period over which the note is to be repaid (e.g., 5 to 10 years), as well as the collateral/other security to be held in case of default.

Again, these are general provisions – your business is unique, and so should your Buy-Sell Agreement be.

While you may not need a full Transaction Advisory Team in place to handle the sale of your interest in your business to your partner(s), I cannot recommend too strongly that you consult with your trusted business advisors, such as your attorneys and your financial advisor, (be sure they have Transaction Advisory experience), to ensure your Buy-Sell Agreement covers all contingencies, and leaves as little as possible to chance and/or the last minute.

Your advisors should also be enlisted both at the time of drafting the Buy-Sell Agreement and again at the time you and your partner(s) begin serious contemplation of transferring your interest in the business, to assist and guide both you and your partner(s) through the transfer process. Your trusted financial advisor can also assist you in minimizing any tax liabilities resulting from the sale.

If you are considering a potential sale of your business interest to your partners, I recommend strongly that you consult with us before making any decisions.

Please click here to let me know how I can help you.

Until next time –

Peace,

Eric