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When one partner wants to take profits out and the other wants to invest.
How can I buy a partner out of my business? - Dec. 10, 2007
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(FORTUNE Small Business) -- Dear FSB: My business partner and I each own 50 percent stock in a thriving technology business we formed five years ago. Recently, my business partner announced that he wants to start taking large amounts of the profits. I see this as a roadblock to continued growth and wish to keep my share of the profits in the company. Advice?
- Sam Johnson, Syracuse, N.Y.
Dear Sam: It seems that you and your business partner have fundamentally different visions for the future of the company. If he wishes to remain a partner in the business, then you will have to reach a compromise on taking out profits and continued growth. If, however, your partner is interested in stepping away from the company financially, our experts have some ideas.
Jordan Klear, a private equity executive with Philadelphia-based Tivis Capital suggests two options. First, you could declare a shareholder dividend: both of you would receive the dividends, and you could reinvest yours by purchasing shares in the company at the current valuation. Bear in mind, however, that this would designate you as majority owner, which may require revisions to the operating agreement and, possibly, the structure of the board. Also consider that, as a majority owner, liabilities will no longer be equally distributed between you and your business partner.
A second option would be to bring in an outside private equity firm to invest directly in the company. Some of this capital could be put into the future growth of the company, while the rest could go toward purchasing shares from your business partner. Of course, this option alters the firm's operating metrics and may put your feet to the fire more than you'd like.
Professor Phillip Phan of the Lally School of Management and Technology at Rensselaer Polytechnic Institute suggests a third option for outside financing. "If you have a five year history of positive sales, you could easily get debt financing from a bank and use that to buy your partner out," he says.
Phan also points out that there are some benefits to going it alone. If done properly, a buyout may be to the company's advantage, as it provides the business with a singular vision. If you believe your partner still has something to contribute, arrange to employ him as a consultant or employee.
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