Buying out a company from a good friend

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August 04, 2021

by a searcher from University of Pennsylvania - The Wharton School in Philadelphia, PA, USA

Thinking of buying out a very, very small company from a good friend who sold organic tea leaves straight from the farming country. He only seemed to sell to family and friends, but I like the idea and want to take it bigger. Right now I have 50% of the company but would like to one day own it, yet I still would like his help for the near future. Does anyone have any experience or resources in structuring a buyout? I am willing to give a percentage of profits, but not indefinitely and I would like to structure a fair buyout that he and I would both find attractive. Keeping it simple he wants cash and I want equity.


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Reply by a searcher
from Texas A&M University in Johnson City, TN, USA
You could do this as a Seller Note of many varieties. If your friend wants out of management/participation, this might help you get 100% equity now, paying your friend back cash along the way. You can tie this Note to % of profits as you suggest, but put a limit on the term. You negotiate it all now, so if business grows, everyone should be happy. If he's concerned, you can offer a stock pledge if you do not meet your payment requirements.

Put/call options assigned based on some mutually agreed formula for valuation might also work if you want to engage him for longer, motivate him with larger share of growth. Make sure that you're in majority board position. You could alternatively/additionally, include a shotgun provision in share holders agreement. Communicate to your friend why you are including these, but Put/call should put his mind at ease too that he knows what he is growing/building. You could tie to Sales, EBITDA, some combo. If it fizzles, you'll want options for either of you to get out.
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Reply by a searcher
from Washington University in St. Louis in St. Louis, MO, USA
I actually did someting similiar in###-###-#### I run a board game publishing company and bought a "competing brand" that was actaully owned by some friends of mine. It was mainly a hibbby then but it involved real money. I digested lots of books, seminars, and meetings with other who knew more than I did, both beofre and after the deal - about buying and selling companies - I actually think (just my humble opinion) the easiest part is the accounting and legal side of the deal. That's being done hundreds (thousands acually?) times each day. The difficult part is finding a deal that seems "fair" to both of you, without by default ending up with no deal and hurt feelings / pride and still having to work together. I think there are ways to do it, maybe the best is to bring a 3rd party in to say this is what the deal could look like, in order to set expectations. If either party thinks it's way off then you don't proceed, or the 3rd party works with them understand what is reasonable to them. Just my two cents.
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