In today’s Freedom Friday blog and email newsletter, I want to answer a question that I probably do not get asked often enough, and that’s about “business partners”. I get a lot of questions about adding a member or member(s) to an LLC, or to some other kind of “partnership” arrangement, but I don’t get asked often about how to buy out a business partner, or a fellow LLC member. In fact, many times someone has either attempted to remove, or otherwise has tried to “buy out” a business partner or fellow LLC member and has not followed the procedure outlined in the partnership agreement or the LLC operating agreement (or corporate bylaws), etc., and this results in a lawsuit. However, a lawsuit regarding this issue can be avoided if you follow some practical steps. So, in today’s Freedom Friday blog an email newsletter, I’m talking about how to buy out a business partner in 2025.
Before you start the process of buying out a business partner (or fellow LLC member), it’s important to identify and understand the reasons why you’re moving in that direction. Some of the common reasons for a buyout process are different visions for the business, one of the partners or LLC members is retiring from the company, disputes among the business partners or LLC members, and a desire for sole control over the business by one of the business partners or LLC members. Whatever the reason is, here are five (5) steps to successfully buy out a business partner (or LLC member):
1. Follow the Formation Documents
The first step to successfully buy out a business partner (or LLC member) is to follow the formation documents. If your business is structured as an LLC, it should have an operating agreement which should explain how you can buy out a fellow LLC member. Likewise, if your business is structured as an actual partnership, you should have a partnership agreement which explains the buyout process, as well. If your business is a corporation, the bylaws and/or shareholder agreement are the formation documents which explain the buyout process. If you do not have a strong buyout provision as part of your formation documents, then you should consider amending them before beginning this process. Nevertheless, you need to follow the steps outlined in your formation documents as a starting point for the process.
2. Get a Business Valuation
The second step to successfully buy out a business partner (or LLC member) is to get a business valuation. Many LLC operating agreements and partnership agreements will require a neutral party to do a business valuation to find out the value of the business and the value of each partner’s or LLC member’s “share” of the business. There are two ways to get a business valuation. You can either get an independent appraisal by hiring a professional business valuator to provide an objective business valuation, or the partners (or LLC members) can arrive at an agreed business valuation, especially if your LLC operating agreement or partnership agreement requires specific methods of valuation, e.g., book value or market value. Some of the factors in getting a valuation include revenues, assets, debts, and goodwill.
3. Negotiate Buyout Terms
The third step to successfully buyout a business partner (or LLC member) is to negotiate buyout terms. Once the business valuation is completed, the next step is to negotiate the terms of the buyout agreement. The buyout agreement should have several key terms including the purchase price, payment terms (lump sum or installment plan), a transition plan, and any non-compete or non-solicitation agreement desired.
4. Draft the Buyout Agreement
The fourth step to successfully buyout a business partner (or LLC member) is to draft the buyout agreement. The parties should hire a business attorney to draft the buyout agreement. The buyout agreement should include details of the sale, viz., the amount and payment structure, representations and warranties of both parties, any provisions of indemnification, confidentiality provisions, and any release of claims. The buyout agreement should also include any provisions for financing the transaction.
5. Amend Formation Documents
The fifth step to successfully buyout a business partner (or LLC member) is to amend the formation documents. Regardless of whether you have an LLC operating agreement, a partnership agreement, corporate bylaws and/or a shareholder agreement, these documents must be updated to reflect the new ownership and any other relevant changes.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at Jonathan@libertylegalok.com to schedule a FREE strategy session.