Financing a Partner Buy-In Agreement

Financing A Partner Buy-In Agreement

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The pandemic has led many business owners to take a long look at their company’s future and their ongoing role, so it comes as no surprise succession planning is on the minds of many.

The COVID-19 pandemic has impacted businesses in many ways, separating companies that are nimble and agile from those who have found it difficult to pivot.

Beyond day-to-day challenges, the pandemic has also led many business owners to take a long look at their company’s future and their ongoing role, which must now include planning for an ever-evolving economy.

As such, it comes as no surprise succession planning is on the minds of many. What will happen to your company when you’re ready to move on or if something happens to you?

If you have a succession plan in place, you’re ahead of most companies, but if not, the pandemic likely has served as a not so gentle wake-up call.

Business owners naturally focus on their own retirement plans when creating succession plans, but their exit is only part of the equation.

An effective succession plan also has to consider preparing a current employee – or employees – to replace the retiree and take ownership of the business.

This process is often referred to as a partner buy-in agreement.

Why a partner buy-in agreement?

A formal partner buy-in agreement is critical for two reasons:

2. An agreement assures the new partner(s) will eventually benefit from the extra responsibility associated with their new role(s).

What makes up a partner buy-in agreement?

• Partner buy-in agreements should be explicit in describing costs, financing options, and expectations for a new partner or partners.

• Agreements should spell out roles, required performance, and any mandatory professional development.

How do you finance a partner buy-in agreement?

Few potential new partners have access to a significant amount of cash. A more practical approach is:

• The current partners arrange and guarantee financing from an outside lender, helping the new partner obtain a better rate and terms.

• New partners pay the borrowed amount directly to the company, which adjusts their compensation to cover the debt service.

• The company receives a healthy infusion of capital in return for taking on the loan guarantee.

For more information on partner buy-ins, check out our blog, A Simple Map for Partner Buy-Ins:

https://www.oakstreetfunding.com/simple-map-partner-buy-in/ �