Leaving a business is never a small decision, especially when you’re a partner or shareholder, rather than the sole owner. Unlike selling a business outright, selling shares in order to make your exit has several unique challenges like legal agreements, partner approval, valuation disputes, and finding the right buyer. If you’re considering selling out of a partnership, it’s essential that you understand both the process and the potential pitfalls.
In this article, we’ll break down the key steps and considerations of selling your shares in a business:
Selling Your Shares: Legal, Financial, and Practical Essentials
Understanding Your Position
The first step in selling your shares is knowing how your business is set up. Not all ownership structures are the same. If your business is organized as a general partnership, ownership transfers can be complicated and often require unanimous partner approval. If you’re part of an LLC or corporation, your ability to sell may be controlled by an operating agreement or shareholder agreement.
These agreements often contain buy-sell clauses, which may limit who you can sell to and at what price. For example, they may give existing partners the “right of first refusal”, which means they get the first chance to purchase your shares before you can approach an outside buyer.
If you’re unclear about your rights, review your agreements and consult a business attorney. Understanding the ground rules upfront saves time, avoids conflicts, and ensures you know your legal options and obligations before you start looking for buyers.
Valuing Your Shares
Once you know you can sell, the next question is: “How much are my shares worth?” Valuation is often the most sensitive part of the process. Unlike selling physical assets, valuing shares requires a fair approach that both you and potential buyers can agree on.
Common valuation methods include:
- Book Value: Based on a company’s net assets.
- Earnings Multiples: A multiple of profits or cash flow, common in well-established businesses.
- Independent Appraisal: A professional valuation that brings credibility and objectivity.
An independent appraisal is usually the best route, because it removes personal bias and creates a defensible price point. Remember: a buyer doesn’t want to only see what the business is worth today, but also its potential for future earnings.
Who Can Buy Your Shares?
Once you know your shares’ value, you need to identify potential buyers. In most cases, your partners will be the first and best option. Keeping things “in house” keeps ownership stable and avoids outside influence.
If your partners aren’t interested, you may consider external buyers. This could be another investor, a competitor, or even a new partner. However, most partnership agreements restrict external sales, and many partners will resist bringing in an outsider.
A third option is for the company itself to buy back your shares. This can be a clean solution if the business has the resources, but it requires careful structuring to avoid financial strain on the company and reduce tax burdens.
Preparing for the Sale
Even if you’ve identified buyers, the sale won’t move forward smoothly unless you’re prepared. Preparation is where many businesses fall short, and failing to have everything in order ahead of time can cost you significant time and money.
Start by cleaning up your financial records. Buyers and partners will want to see clear, accurate books for a proper evaluation, preferably audited or reviewed by an accountant. Resolve outstanding disputes, settle debts, and make sure all your contracts and agreements are current.
On the legal side, ensure your documentation is in order. Work with a tax advisor to understand the implications of the sale. Will your proceeds be taxed as capital gains, or as ordinary income? Planning ahead can save you thousands.
Finally, think practically about your daily operations. If you play a critical role in the business, plan a transition period so your exit doesn’t create any disruptions. Document processes, create training materials for software or equipment, and set up anything else that will make the transition easier. A business that can run smoothly without you is always more valuable.
Negotiating and Structuring the Deal
When it comes time to negotiate, clarity is everything. Both sides should know what’s being sold, how much is being paid, and when the payments will be made.
Deals are usually structured in one of two ways:
- Lump Sum Payment: Clean and simple, but requires the buyer to have the capital on hand.
- Installments: Payments spread out over time, often with interest. This makes the purchase more affordable, but exposes you to risk if the buyer defaults.
Other considerations include non-compete agreements, liability releases, and earn-out provisions. A written agreement drafted and reviewed by professionals is non-negotiable. Don’t rely on handshakes or informal agreements. Your goal is to walk away with peace of mind and no loose ends.
Personal and Strategic Considerations
Selling your shares isn’t just a financial decision; it’s a personal one. Many business owners underestimate the emotional impact of leaving a company they helped build. Before you sign anything, ask yourself: “Why am I selling?” Are you retiring, moving on to a new venture, or stepping away due to disagreements? It’s important to know your goals and have a plan for what comes next.
In addition, it’s essential that you prepare for your financial future after the sale. The goal is to walk out with as much money in your pocket as possible when all is said and done. Don’t forget to plan ahead for the tax and financial implications of your exit — a little preparation now can prevent costly surprises later.
Selling out of a partnership is rarely simple, but with preparation and the right advice, it can be a smooth and profitable process. Start by understanding your ownership rights, get a fair valuation, identify the right buyer, and prepare both legally and financially for the sale.
Above all, it’s essential to work with experienced advisors when making any sort of exit from a business. At The FBB Group, we help buyers navigate the business sale process with confidence, connecting you with trusted professionals, managing negotiations, and keeping the deal on track, from preparations to final closing.
To see how The FBB Group can help you successfully sell out of your partnership, give us a call at (800) 395-7653 or get in touch with us online to get started.