Buying into an existing business as a partner is a big move for both parties. It can be exhilarating for the new owner as well as nerve-wracking for existing owners who will see their share of the company shrink or even disappear. Both parties must consider the impact carefully and take their time negotiating this important strategic business move.
A partnership is a legal arrangement in which two or more people pool their resources to create and run a business. Partners each contribute a portion of the capital to the business and take part in profits and losses. Successful partnerships can create more opportunities to succeed than a single person could accomplish alone, but they are also susceptible to mismanagement and disagreements.
The most common method for a new person to buy into a business is by purchasing the company’s equity. This is typically done through a private investor or the Small Business Administration. In the latter case, a loan is usually required to purchase the business’s equity, and the lender will require an independent third-party valuation to determine the fair market value of the company.
It’s also important to discuss who will be liable for the company debts when a new partner buys in. Adding someone as a partner may make them jointly responsible for certain company liabilities, and this must be clearly outlined in the partnership agreement. Otherwise, it can lead to costly conflicts in the future.