Buy Out or Phase Out a 49% Partner

Buy Out or Phase Out a 49% Partner

Issue: A business owner was looking to buy out or phase out his 49% equity partner

Significance: From 2017-2018, the business had seen a sharp decline in revenue, from $2.5 million to $1.4 million. The business had to lay off more than 50% of the staff, and the owner needs to increase sales before attempting to sell the business again.

Background: Owner feels that he is a good guy but has not produced at an acceptable level in quite some time. Their contributions are not commensurate with the salaries drawn.

Prior Actions Taken:  They have had several conversations and have brought in experts to show him the difference between ownership and employee. His position continues to change and he has never met his new goals.

Recommendations:
Owner must have a valuation done on the business. to determine the value of his share and speak with an attorney to determine your options and develop a plan and sequence of execution. An amicable agreement is best, however:

  • Create a file documenting events tied to his performance over time
  • Terminate him with severance
  • Create the above situation requiring him to decide (make him uncomfortable financially
  • Make it clear there is no profit for distribution
  • Ultimately either agree on a buyout or move towards legal action.

Should the owner choose to continue to delay it will only serve as a frustration and drain on both he and the business. Owner may need to overpay in order to arrive at a resolution.

Outcomes:  A meeting with the attorneys took place with the following strategies determined:

  • A valuation was completed
  • It was determined to be cost prohibitive to purchase the partners shares
  • An amicable strategy was determined where the partner would serve as company liaison

Amicable discussion with the successful understanding of the partners contributions and an agreement of a long term strategy for growth to make the company saleable within 10 years to the benefit of both parties

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