Why and How I buy out Business Partner
The past few months of building up the business with my business partner were enjoyable. Still, at the end of 2021, I decided to buy out my business partner. I looked for every information regarding buying out a business partner, sadly didn't find any information that is useful in my situation.
As the business started not long ago and it's still small, we do not have any lawyers, accountants, or even a staff. I have to come out with everything from scratch from what I know. I will share in this article why and how I buy out my business partner.
What Makes Me Decide to Buy-Out My Business Partner?
The main reason I decide to buy out my business partner is that he is unable to commit to the business as he has to work on his career path for his dream. Since my business partner could not commit to the company, I decided to talk him out and suggest that I would buy him out.
As our business startup with 50/50 profit sharing, it will be unfair certainly if we don't commit an equal amount of time to the business. After discussing with my business partner, he agrees on letting me buy out his share.
A few things that I regret not doing at the start of the business are to decide wisely if I need a business partner. The other thing that I regret not doing when getting a business partner is drafting a partnership agreement. After deciding to buy out my business partner, I only realised how important the partnership agreement would help me if we had that initially.
How To Calculate?
As I'm the one who did all the financial work at the time we started the business, I know that our company did very well in the first six months. As I searched through the internet for how much I should pay to buy out my business partner, which was nothing much helpful, I sought advice from my dad, who has experience on this.
So below is an example of how I do the calculation without an accountant:
(Assets - Depreciation on Assets) + Floating Cash + Cash On Hand + Inventory Stock Value = Total Company Worth
With the company's Valuation, since we decided on 50/50 on the first day of starting the business, I divided by two from the valuation calculation above.
Inventory Stock Value
Depending on what you are selling, you may want to calculate the dead stock valuation for your products. Upon evaluating your company as the dead stock might cause your cash to be stuck there, which will bring in cash flow problems in the future to your business.
The longer the stock in your warehouse with no sales, it will depreciate when time passes—especially when the trend of the product ends, and the product is near expiration. When the product is not as new as it arrived, you should consider it when evaluating your inventory stock value.
Drafting Agreement ( Memorandum of Understanding )
When preparing the MOU, there are many templates on the internet that you could download from, but there are a few things you must make sure to mention in the MOU.
Valuation of the business ( Percentage of each ownership )
Ownership Transfer ( Business will be transferred to you, and your business partner have no further demand or interest in the business
Payment ( Within x amount of days after signing, you will transfer to your business partner )
Complete Understanding of the MOU Amendment
Choice of Law
Compliance with Laws
Balance Sheet
The above is necessary and will need to be included in the agreement to ensure there is no further argument about the business.
Conclusion and Advice
If your company is financially sustainable, I advise hiring an accountant and lawyer to evaluate your business and draft your MOU. When looking for a business partner, always make sure to have the partnership agreement before doing anything.
"先小人后君子" ( Be clear with each other first and be courteous to each other later. )
