How to Bring in a New Partner
How to Bring in a New Partner
By Matt Dickstein, Business Attorney
In this article, I will give you a quick overview of how do you buy into a company to bring in a new shareholder or partner to help with your business. If you are on the other side of the table as the new partner, read this article to learn the issues at stake when you step into the business.
Culture Fit. The primary risk in bringing in the new partner is that your existing group and the new partner might not fit well together. For example, you and the new partner might differ on the group’s guiding principles or work ethic, or the new partner’s skills might not be a good fit.
Compensation. Once you are confident that the new partner will fit in with the existing group, you must set a level of compensation for the new partner that is fair to him or her and to the existing partners. It can be hard to get right and keep right a group’s compensation structure.
Buying into an existing business as a partner the Company. After salary, ownership is the next major obstacle. You must decide the percentage ownership that the new partner will receive. Then you must decide how much the new partner will pay for his or her stake and whether the new partner will pay in installments and/or through salary reduction. You will find that, for many reasons, existing partners will want a high buy-in price.
Liabilities. If the existing partners are liable for buying into a company debt, then be clear about the liabilities that the new partner will become responsible for. Will the new partner guarantee existing loans or leases? Will the new partner step into a capital call?
Exit Strategy. Now that you have agreed to the entry of the new partner, you must agree to his or her exit. The existing partners and the incoming partner all need to have an exit strategy in mind. The most common exit is the termination of the partner’s employment plus the buy-back of his or her equity. The company might also give severance pay to the departing partner/employee.
This is where a buy/sell agreement comes in. A buy/sell agreement is essentially an agreement for exiting a company. A buy/sell agreement works like this – the agreement names certain trigger events for buy-back (e.g. termination of employment, death) then it either requires or permits the buy-back of the partner’s equity on the occurrence of that specific event. Then the agreement sets a price for the buy-back.
No-Competes. The last item to keep in mind is whether the company will lock up the departing partner with a non-competition covenant. A buying into a partnership agreement may prohibit a withdrawing partner’s competition in a limited geographic area for a limited time.
This article only gives a short roadmap of the issues involved with bringing in a new partner. There is a lot more to bring in a new partner than introduced here. Before you bring in a new partner, get competent legal counsel to help you.
We hope you found this article about “How to Bring in a New Partner” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
To receive our free newsletter, contact us here.
Subscribe to our YouTube Channel for more updates.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
GROCO.com is a proud sponsor of The American Dreams Show.
The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.
Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.
They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.
Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
Positive Work Environment
Positive Work Environment Written by Traci Bullock. Creating a positive work environment is essential for the success of any organization or company. A positive work environment not only increases productivity and employee satisfaction, it also attracts and retains top talent. In this article, we will discuss key elements of creating a positive work place: making…
Unlocking Success with Lynn Thomas CEO of Thomas Consulting One Great Idea at a Time
See Lynn Thomas‘ Recent Interview with Alan Olsen: about unlocking success one idea at a time, video here: https://youtu.be/0VFOWFl3wqk Lynn Thomas has been helping clients unlock success, one idea at a time by executing tailored client presentations that deliver extraordinary client experiences. Her firm specializes in creating and implementing plans based on new tax laws…
Pushing the Boundaries of Science and Technology since 1973: Terrific Insight from Dr. Lee Hood
See Dr. Lee Hood‘s recent interview with Alan Olsen: about pushing the boundaries of science and technology: https://youtu.be/60DDZ0MJ8QE Dr. Lee M. Hood is best known for his development of technologies which have enabled the advancement of predictive, preventative medicine. Dr Hood’s journey began at a young age, when he was an assistant professor of molecular immunology…
Ali Nasser: Building A Successful E-commerce Business From The Ground Up
See Ali Nasser’s interview with Alan Olsen: about Building A Successful E-commerce Business From The Ground Up on YouTube: https://www.youtube.com/watch?v=MJyKKqTCaBM Ali Nasser is a serial entrepreneur who has been helping business owners for nearly twenty years. He understands the legacy dilemma and financial freedom that many business owners face when it comes to their life…