What are the Steps in Buying Out a Business Owner?

April 11, 2020


In this video, you get answers to these questions:

  • What are the steps in buying out a business owner?
  • Are you getting along well with your business partner?
  • Can you force a business partner out of the business?
  • What can you do if you don’t have an agreement in place?

Video Transcript

What are the steps to buying out a business owner? That’s the question I’ll be answering today. I’m Aaron Hall, a business attorney in Minnesota.

Let’s jump into it. Imagine you are in a business with a partner of yours. It doesn’t matter if it’s an LLC or a corporation, and let’s say you are not getting along well. You can’t agree on things. You want to get out. You want to buy your partner out or you want to get out. What are the steps to getting out of the business?

Well, first off, if you have an operating agreement or a member control agreement, shareholder agreement, business owners agreement, buy-sell agreement. These go by a lot of names. What the bottom line is, do you have an agreement among the owners about how a separation would work? If you do, you take a look at that. That’s a given. You probably guessed that.

Let’s now jump to what happens if you don’t. Well, you’re probably wondering, can you force the other owner out? No, you can’t force him out. A court could, but you can’t. You can’t force somebody to sell their shares. You might say, “Can I force them to buy my shares?” No, you can’t. You can’t force anybody to buy your stuff. Think of this like a piano. If your friend owns a piano and you own a piano, can you force your friend to buy your piano? No. Can you force your friend to sell her piano? No. So you both have ownership interests, and neither one can force the other out.

So what do you do? Well, if you don’t have an agreement in place, of course, the next step is to try to negotiate something. You go to the other business owner and you see if you can negotiate a buyout. You buy that person out, they buy you out. You would talk about all sorts of things, like what is the price? When would the transaction occur? Would the payment be all at once in a lump sum or would it be spread out over time with monthly or other periodic payments? And what are the other terms? Can the other business owner go out and compete with you immediately if they leave the business, or can you compete if you leave the business? Can you take client relationships?

Often in a small business, let’s take two chiropractors for example. If the chiropractors decide they can’t keep working together and so one buys out the other, what’s to stop a bunch of the patients from following the chiropractor that departs or dentists or attorneys or whatever we’re talking there? That’s a big issue in service industries, especially where relationships are built with the business owners.

All right, so let’s say you work something out great. You can draft up an agreement. That agreement might be a onetime event where both parties sign it and there’s a transaction, kind of like buying other simple or many simple items like buying something at the store, or it might be like buying a house where you have a two-part transaction. You agree to the initial terms and sign a purchase agreement, but then there’s actually a transaction, a closing delivered at a different date when the shares exchange hands. That is often the case when financing is involved. So you agree to a deal, but then you need to go get some bank financing and maybe the deal is contingent on you getting a loan from the bank to buy out the other owner. So that’s what a two-part deal looks like. You agree to initial terms, and then you close the deal once everything is done in between.

But what if you can’t come to terms? What if you can’t come to an agreement? Well, usually, there is a process to apply to the court for a closing of the company. Now, this is where it gets hairy. It depends on if it’s an LLC or a corporation. It depends on what state you’re in or maybe have a partnership. There are a lot of different rules regarding how this works, but the bottom line is if there is conflict and you can’t keep going to business together, you can typically appeal to a court to separate you. Think about a marital divorce, it’s kind of like that. Look, if you can’t get along, let’s figure out some way to separate these assets.

Now, that’s where you’re going to want to talk with an attorney because there are important statutes protecting the rights of business owners and limiting what business owners can do. There are fiduciary duties. That means business owners owe a duty to the other. A duty of good faith, a duty of loyalty, a duty of honesty, a duty of care. So these are fiduciary duties that are owed to each other, but simply by the fact that you are in a business with somebody else. The law says if you’re business partners, you owe fiduciary duties to each other and the business.

So, how do you separate? To recap here, you can’t force someone to sell. You can’t force a business partner to buy you out. If you can’t come to terms in an agreement, you probably have to go to court, and you’ll want to hire an attorney at that point. And I’ll tell you, it’s not going to be cheap. This is not typically like a divorce, and divorces themselves, marital divorces can be expensive. Business owner divorces typically are a lot more expensive because there’s a fight over the value of the business and who’s going to buy the other person out? Are you going to liquidate assets at fire-sale prices? The attorneys get involved, they have an interest often in fighting and pushing this forward. So by far, the best option is to work out some agreement with your business partner and far better to do that before problems arise and conflict comes between you.

That’s why doing this in advance, in a buy-sell agreement or shareholder agreement, that by far is the best way to do it. Think about it. You’re going to leave the business one way or the other, through death or otherwise. Likewise, the other business owner will, and if you’re not there, your spouse or children or heirs will be representing you along with their attorney, and your business partner will end up in conflict with them. So we know that business owners leave a business at some point, whether at death or before, far better to put together a framework for separating in advance.

For more information on this, you’re welcome to check out aaronhall.com. There are links in the description below. And if you like this educational video, feel free to subscribe to this channel so you get notified of other videos like it coming up. And please note the disclaimer below. This is general education. I encourage you to use this video to identify issues to discuss with your attorney who can advise you regarding the specific circumstances you are in and the laws that are important in your state or jurisdiction. I’m Aaron Hall, an attorney representing business owners in Minneapolis, Minnesota.

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