Do you want to sell your own share of a partnership? If YES, here are verified steps to take to sell your share of a partnership. Selling your own share of a partnership can be quite straightforward, especially from an accounting standpoint, as long as the partners have a buyout agreement and the person buying the ownership share can afford to pay for it.
However, like a sole proprietorship, you need to understand that a partnership is closely held and operated by the owners, so a transfer of equity that leads to new management can affect the business’s identity and future.
Ideally, it is advisable to first work closely with your partner or partners to develop a plan that benefits the staying and exiting partners and the business as a whole. All these will be made simpler if you create a clear buyout agreement when starting your company. The agreement is expected to discuss what might lead to one of the partners wanting to sell his or her share and state the terms and timing that would apply.
Also, note that this agreement is expected to state whether any partner can sell to an outside party or whether a partnership interest can only be transferred to the partner or partners who remain. And it should institute a framework or process for valuing the partnership share that will be sold, such as basing the price on gross sales, net profit, or a long-term investment.
In addition, the sum you receive for your share of a partnership should compensate you for your investment of time and money. If you do not have a buyout agreement or if your agreement leaves room for negotiating a buyout price, strive to stick to an amount that will compensate you fairly without bankrupting your partner or partners.
Have it in mind that a business partnership is like a marriage, and it wouldn’t be ideal to just transfer your stake in a marriage to a stranger. Your stake in your business will need to be sold to someone who has the money to pay for it, the ability to run the company, and the potential for a good working relationship with the partner or partners who remain.
If your buyout agreement doesn’t specify who is eligible to buy in, work with your partner to find a suitable replacement who meets your financial needs and your partner’s practical needs. And although you may be able to complete the sale of ownership in your partnership through a transfer of funds and a signing of papers, the success of your partnership after you leave will depend in part on how thoroughly you transferred your knowledge.
It’s indeed not so hard to sell a business although it can be tricky and complicated if not handled right. Allowing a partner to completely own the business is arguably one of the commonest ways of transferring ownership.
Steps to Sell Your Share of a Partnership
Most times all you need is a prior agreement that you entered with your partner before the beginning of the business covering lots of matters, including dissolution/buyout guidelines. However, if you don’t have one, you might want to seek the counsel of an acquisitions lawyer. Nonetheless, steps to take include;
Know the Value of the Business
Have it in mind that if you had come up with a buyout agreement at the beginning of the partnership you may have agreed to always ensure the business is valued, perhaps annually. If you don’t have such an agreement, before entering any negotiation it is imperative you have the business valued.
In valuing the company, the experts brought in will ensure all future expected profits are analyzed, including discounting projected future income for every month or year as per expected returns.
Funding the Buyout
Even in a partnership, either of the partners can seek complete ownership or sell to a different party. You may want to sell your stake to your partner, but he or she may not have adequate resources to fund the buyout. At that point, buying your shares immediately or fast might not be easy. Howbeit, you might want to be flexible with other types of financing, such as third-party funding, owner finance, or even earn-out arrangements. In addition, you can request a sale option where payouts are done over a number of months or years.
Consider Taxes and Selling Price
Note that anything you make out of the sale could more or less be affected by taxes even when the other partner is funding with their finances. You might have to find alternative means to minimize the expected tax burden though you might need some strategic planning and time.
If there is a buyout agreement, just ensure that it is updated regularly and the terms are still acceptable. Additionally, you might want to clarify whether the agreement shows the process of determining the sales price. Nonetheless, understanding the agreement is key in every way.
Plan and Plan Some More
Contingency planning is very crucial in any partnership. Sometimes, partners in business can cover one another so well that they offer some form of false security. In that situation, preparing effectively might elude your thoughts. If your plan has always been to sell to your business partner, any unforeseen eventuality can bring a lot of unplanned heartache and problems, such as illness, business damage, and disability among others.
Additionally, just when you’re ready to sell, your partner might indicate their disinterest or simply lack the funds to complete the buyout complicating your plan. That’s why you need to always have a contingency plan in place that looks at the most possible scenarios. Note that you cannot really prepare perfectly for everything. In the best possible circumstances, everything will be agreed upon and negotiated smoothly and amicably with or without a buyout agreement.