How to Buy a Percentage of a Business

Finding a Business Opportunity

Decide what you want out of a business partnership. If you want to buy a percentage of a business, you need to know upfront what kind of stake you want in the business. Think about what you bring to the table, and what you can offer the business in terms of skills, expertise, or financial support. For example, if you want to be more of a silent partner and leave the majority of operations up to the existing owners of the business, you wouldn't want to partner with someone who was planning to retire in a year. On the other hand, if you want to take an active role, identify skills and knowledge that would make you valuable to the business in the role you want. Make a list of the skills and experience you have that would help the existing owners. They will likely be looking for a complimentary fit – someone who can bring in additional skills or expertise that they don't already have.

Identify businesses with investment potential. Generally, you want to focus on businesses nearby that operate in an industry with which you have experience. Additionally, the business should be one that seems to be needing what you have to offer. Generally, you can talk to people you know in the industry to get an idea of various businesses in need of additional investment or open to additional partners. It may also be that you already know someone (a friend or family member, for example) who is looking to add a partner to their business. Even if you know the existing owners well, do the same research on the business as you would if you were contemplating partnering with a stranger.

Research the legal and financial history of the business. Search the name of the business online to read reviews and learn about its general reputation. Then check for any lawsuits or corporate filings. Make sure the business isn't in trouble before you get involved. This research will continue after you start talking to the existing business owners about buying a percentage of the business. Ask the existing business owners if you can review their financial and business records, or hire an accountant to audit these records for you.

Contact the existing owners and make your pitch. If you've decided you want to buy a percentage of the business, write up a basic offer and send it to the existing owners. Let them know that you're interested in buying a percentage of the business, and what kind of role you see for yourself. This is a basic, introductory letter. Keep it to a page, and encourage them to get back in touch with you if they want to discuss things further. Your tone should be friendly, but professional. If you want to be a little more aggressive, you can let them know that you'll be calling on a particular date to follow up. Highlight the benefits you could bring to the business, as well as what attracted you to the business in the first place. Keep your focus on how you can help the business continue to grow and succeed.

Get an independent valuation of the business. If the existing owners are open to adding you into the business as a partner, find out how much that business is worth. An independent valuation will also help the existing owners, as they will have to realign the percentages of the business they own after you come on board. Before you sink money into a business, you want to know exactly how much that business is worth. You also need an objective assessment of that business's potential. While the existing owners may provide you with their own valuation, it may be subject to bias. Reach out to leaders in the industry to get recommendations for a business appraiser. Look for someone who has a professional designation, such as CBA (Certified Business Appraiser).

Negotiating with Existing Owners

Meet the existing owners in person to present your offer. Ideally, any formal negotiations should be done in person. This way you can observe the body language and general attitude of the existing owners. If you can't meet in person for some reason, at least try to arrange for video conferencing. Have all points of your offer in writing, including the amount of money you're willing to invest and the role you want to play in the business (if any). Bring a copy of your résumé and any additional information that will back up your statements about your skills and expertise. Meet in a neutral location where no one will be unduly distracted by business responsibilities during the discussion.

Discuss the existing owners' concerns. After you've presented your offer, the existing owners may have issues that they want to raise. Listen politely to what they have to say, asking for clarification or additional information as necessary. If they want additional documentation or verifications from you, set a date to get that information to them. Typically, small business owners are willing to take on another partner either because the business is rapidly expanding, or because they are looking to retire soon and want someone to take over the business when they do. Make sure you find out their motivations for allowing you to buy a percentage of the business.

Explain the benefits you will bring to the business. The existing owners need to know how you will improve their business and help it grow and succeed. If you have experience in areas where they are weak, that demonstrates they have a need for you. For example, suppose you are an expert in social media marketing. The business doesn't have much of an online presence at all apart from a website that was last updated 5 years ago. If you are willing to take over their online marketing, you could add tremendous growth potential.

Listen to counter-offers or alternative strategies. The existing owners may be open to you buying a percentage of their business, but on different terms than you suggested. Consider these thoughts and determine whether a compromise can be reached. For example, suppose you want to buy 25 percent of a coffee shop, but you don't want to be involved with the actual operations. The existing owners want you to work in the coffee shop at least 1 day a week. If you can't do that, then you might counter that you would be willing to take 20 percent without involvement.

Follow-up with a summary of the meeting. Send the existing owners a written letter (or email) that outlines your understanding of what was discussed at the meeting and what the final outcome was. Send your letter as soon as possible after the meeting ends. If you reach an agreement with the existing owners, make sure you're all on the same page. It's entirely possible that each person walked out of the meeting with a different understanding of what would happen next. Even if you didn't come to any agreement, writing out the points of the meeting and the areas where you disagreed can help you find a compromise that could lead to a deal.

Finalizing the Agreement

Choose the best organizational entity for the business. If a business has more than one owner, your interests will be best protected if you organize the business as an LLC or a corporation. If the business isn't already organized this way, talk to the other owners about which they prefer. If the business is currently operating as a sole proprietorship or a partnership, have all the owners meet with an attorney who specializes in small business organizations. They can discuss your options with you and help you draft the documents you'll need. If you have experience with different types of business entities, share your experience with the other owners. Let them know which you prefer and why.

Draft a partnership or share agreement. Before you hand any money over to the business owners, get an agreement in writing that outlines the ownership shares and responsibilities of each respective owner. You may draft the agreement, or one of the existing owners can draft it. You can also hire an attorney to draft it for you. Particularly if you're going into a small business or working with people you already know well, it may be tempting to skip a formal, written agreement. However, you still want to protect your interests, even if you don't foresee any issues coming up. This agreement should also state what will happen if an owner decides to leave the partnership.

Go over the agreement with the existing owners. After you have a draft, meet with the existing owners to read and discuss it. If there's anything you don't understand or don't agree with, this gives you the opportunity to figure out what happened and make changes as necessary. If you don't understand the meaning of a clause, ask the existing owners what they think it means. See if you can word the clause so that it more clearly reflects everyone's intent.

Sign the partnership agreement and transfer funds as needed. Once everyone is in agreement on the terms of the partnership, sign the agreement along with all existing owners. To ensure the legality of the contract, sign in the presence of a notary public. Make copies of the signed, notarized agreement for the business files and the personal records of each owner. Only give money to the business after all owners have signed the agreement.

File organizational documents with the state. If the business is incorporated or organized as an LLC, you must file documents with the state government (typically the secretary of state's office) with information about the owners and structure of the business. Typically, you must file an amendment document that states the changes that were made to the existing business. This document sets forth the new ownership percentages and contact information for all owners. Check deadlines with the office of your state's secretary of state. Amending documents usually must be filed within 30 days of the date the change was made, but some states may have shorter deadlines.