Buying out partner

Pizza Shop Talk The Think Tank
1

Anyone have any experience buying out a partner? I am an S Corp and am the majority shareholder. How do we agree upon a price? I have invested more capital and am the operator. My partner just invested capital and has had no involvement in the day to day whatsoever. We never signed contracts or made shareholder agreement. Thanks.

2

Lawyer …

3

yup

4

Offer him a reasonable offer to buy him out .

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5

You are going to have to get a lawyer even if he is a friend. Are you profitable? If not, I would only offer to replace his investment. In fact, unless you you are hugely profitable, I would only offer to return his investment.

6

If there is a percentage that you agreed on… I’d offer 2 x Net Income x their % and write a simple agreement that this ends your verbal agreement and any future commitment.

7

  1. Is this something you are both on board with? i.e. did he ask to be bought out or did you bring it up and he agreed?

  2. I am assuming that you have defined % ownership since this would be required for your tax filings. Are both of you OK with those percentages or is this a source of conflict?

  3. Have a look at the post I put up quite a while ago about value: http://thinktank.pmq.com/threads/selling-your-pizza-store-what-is-it-worth.13300/#post-81868

Traditional business valuation would hold that a minority share sells for a discount for lack of control. In other words, when value is determined by earnings and the majority owner can unilaterally change those earnings the majority or control share sells for a premium and the minority share sells for a discount. In many cases a partner buyout would ignore this but it does provide a decent incentive for a minority shareholder to be reasonable as the controlling shareholder can decide to spend money in ways that benefits himself such as bringing his own W2 income up to full market rates if reasonable agreement can not be reached.

The suggestions above are good ones. If the business does not currently produce shareholder dividends the most his share is worth would be what he invested. It might even be worth less than that.

Have you considered asking him what he would take? In a conversation like this, I would prefer to respond to a number rather than put one out there.