2 Partner P'Ship and one Partner wants to buy the other partner out. Negative net profit of P'ship for last 2 years or since being a client of mine. Partner seeking to buy other partner wants me to handle the paperwork but I never done this before. The 2 partners are brothers. Anyone had experience with this before and how did you handle it?
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How do you handle it?
Through a lawyer."The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith -
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I'll be interested in seeing if anyone on this forum advises you to "go for it." ")
I think you're likely to have a nice thread you can print out and hand to the client, if you have any trouble explaining why you aren't going to do it."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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Here are some basic steps. An attorney should be retained to do the legal paperwork.
Step 1
Refer to the partnership agreement. Many partnerships are established with a written partnership agreement. Partnership agreements often cover managerial control issues, non-compete agreements, and contingencies related to exiting the partnership, via an incorporated buy-sell agreement. If the partnership does have a buy-sell agreement, it should have a formula for determining the sale price of each partnership interest, as well as a pre-agreed structure for financing such a transaction.
Step 2
Perform due diligence related to the acquisition. If there is no pre-arranged buy-sell agreement, then the remaining partners may evaluate the buyout transaction like any other investment. Although they may already be keenly aware of the business operations, this means researching potential legal and tax issues that would impact the valuation or feasibility of the proposed transaction.
Step 3
Obtain an independent professional valuation opinion. Although partners may know the underlying business very well, deciding on a fair valuation is a complicated matter. Beyond the technical financial valuation methods that require expert analysis, there is also the issue of subjectivity clouding judgment when dealing with intimate matters such as a partnership. To make a deal work, both sides should obtain professional advice regarding the valuation and structure of a transaction of this magnitude.
Step 4
Structure the deal to align the outgoing partner's interests with the remaining partners. Frequently, it is a best-practice to arrange for so-called seller-financing with earn-out provisions to align the buyer and seller's interests. In seller-financed transactions, the outgoing partner does not receive a lump sum upfront, but instead receives payments over a period of years from the remaining partners. Additionally, as a means of preventing competition or disparaging behavior from the outgoing partner, earn-out provisions adjust the amount of these continuing payments based on the performance of the business. Together these mechanisms help support a maximum transaction price for the outgoing partner while reducing a major source of risk for the remaining partners.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDRComment
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