Business Transition Strategies: Sell Stakes to Partners

In our conclusion to our series on exiting your business, we’ll discuss the option to sell stakes to partners. You can read our strategy overview in our original post or learn more specifics about passing your company on to a family member, using ESOPs, selling to a third-party, and manager buyouts. 

For business owners with partners, the option to sell stakes to partners opens up. In this method, your co-owners would buy you out of your shares for an agreed-upon amount, allowing you to exit with cash-in-hand without the hassle of searching for third-party buyers. 

Typically, these transactions are relatively smooth if all those involved in the partnership are working with the same plan in mind. In some instances, though, competing ideas of the business’s identity and future can complicate things. Agreeing to a fair and equitable solution that considers your partners’ need for assets to continue operations and your compensation for the investment you’ve made in the business is vital for this to be a successful means of exiting. 

Creating a Buyout Agreement

New business partners set themselves up for a smooth transition if they have the forethought to write their partnership buyout agreement when they start their company. Of course, hindsight is 20/20, but it may not be too late to write out those terms now. 

Discuss with all members of the partnership what their ideal buyout would look like and whether they’d be willing to sit down for negotiations. 

It may be helpful to stress that doing so would open the option for all those involved to eventually exit using the same terms, easing their transitions later down the road. 

Your agreement should include a few key elements:

1. Acceptable reasons to sell stakes to partners
2. Timing terms of the buyout, typically based on the number of years as a partner. In most cases, senior partners would negotiate a more significant final figure than someone leaving after only a few years. 
3. Pricing of shares, based on factors such as last reported profits, position, a percentage of money invested in the company over time, or number of years with as a partner
4.  Whether third-party sales of your stakes are allowed, or if internal buyouts are the only option

Negotiate Fairly

As mentioned earlier, a partnership buyout must consider the exiting partner’s investment in the company while still leaving assets on hand for the business to continue operations. 

When you sell stakes to partners, the outcome depends heavily on healthy relationships, as negotiations are likely to develop. If everyone proceeds with the same goal in mind– ensuring the ongoing success of the business while compensating stakeholders fairly– then it will be much easier to create agreeable terms. 

Look over profit statements together and determine how much money is needed to keep things running smoothly. If a business is not profitable, exiting partners must be willing to either accept a smaller total amount or allow payouts over time. 

Leave a Legacy Behind

Pricing terms are not the only topic that needs to be discussed with your partners. To ensure that the transition is smooth, you should be prepared to transfer your skills and knowledge to the person stepping into your position. 

In some cases, a partner is promoted, taking over your duties and training someone new for their previous position. 

Other situations might see all remaining partners absorbing your duties equitably without bringing a new person into the fold. 

Finally, they may leave the position open for a buy-in. A third-party individual or management team would purchase your shares, then assume your role as a new partner. 

No matter which scenario your partnership chooses, you can set your business up for success by creating resources, training plans, and directories that ensure your duties are fulfilled after your exit. Doing so leaves behind a lasting legacy of the time you put into your business by creating the opportunity for ongoing prosperity in your absence. 

Are You Prepared to Exit Your Business?

Change can cause anxiety, stress, and uncertainty. With the right business coach by your side, though, you can handle any hurdles to your transition with confidence. 

Get in touch with Catalyst Group ECR. Founder Lori Moen offers over 35 years of experience as a business owner and trainer in corporate sales and sales management. Exiting business owners coached by Lori find themselves more self-assured about their decision to transition and more satisfied with the final results.