Buying Out a Partner’s Interest in Your Company

Paul Sullivan reported on Friday at The New York Times Online that, “The best strategy for buying out partners is, not surprisingly, to have an arrangement set up in advance, advisers say.

“Rick Marcatos, senior vice president at UBS Wealth Management, said that there should be legal documents that discuss just how any buyout would occur. “To not hamper the company, you can do some payment structure — ‘I’ve been given 12, 18 months to pay you back,’’ he said.

But, of course, that requires planning at a time when entrepreneurs are scrambling to bring their idea to life. When a buyout isn’t so clearly delineated, the options are more complex.”

In his Times article, Mr. Sullivan pointed out that borrowing is an option, as is “mezzanine financing.”

“[Mezzanine] financing looks like debt but the mezzanine lender has the right to convert it to equity. That conversion happens when the company is doing better than expected, since it increases the return for the lender,” the article explained.

Mr. Sullivan also noted that, “Short of turning to a private equity firm, there are family offices and other private lenders willing to acquire companies and give the founders the opportunity to sell some portion of their company yet remain involved.”

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