Corporate Divorce

17 March 2015

Going your separate ways is never easy. If your business partner decides he or she wants to leave the company you both started twenty years ago, you must move forward without destroying the business you have worked so hard to build.

As the remaining business owner, your first step is to determine whether you are prepared and able to run the business by yourself. Do you have a management team to help ease you through the transition? How easily can your former business partner be replaced? You might want to consider selling the business to a third party, facilitating a management buyout or selling to your employees. But if you’re excited about the possibility of taking control of the reigns, then purchasing your partner’s shares of the company might be the right alternative for you. All you’ll need to do is write a cheque and the company will be all yours, right?

If only it were that simple. In the current economic climate most business owners do not have the capital to buy out the other partner up front. More often than not a leveraged buyout will be required, which essentially funds the takeover using a combination of equity and borrowed funds (loans), often using the company’s own assets as collateral.

However this represents a challenge. You don’t want the company to borrow money to the point where it can’t fund growth initiatives and you’d prefer it if your partner wasn’t a debt holder with a vested interest in how the company performs. The negotiation process can become more complicated as you get further into the restructuring possibilities.

There are various ways to structure a buyout. The best decision making tool for the shareholders is to value the company using live numbers. That way they’ll be able to create financial models to forecast the consequences of each possibility and how the transaction will affect not only the company, but also the shareholders personally. This is particularly important if there are more than two shareholders or if ownership is unevenly distributed. When you have more than two owners and one wants out, there is the possibility that not everyone will be interested in buying shares pro rata or helping to fund this individual’s buyout deal.

The transition will be easier if you are prepared and have a defined exit strategy. Every business partnership should have a buy-sell agreement in place – an agreement that essentially obligates one partner to purchase the other’s interest (and obligates the other to sell) upon the occurrence of some event stated in the agreement such as disability, death or the partner withdrawing from the business. Without this you could end up wasting time and money on dispute resolution. Engage the services of a trusted and objective financial advisor who will help you to navigate the entire buyout process from valuation to implementation. In many cases your business’s accounting firm will be well placed to advise on the transaction.

Please get in touch by clicking here if you are considering exiting your business.