Owner Buyout Agreements: Plan Ahead for Changes in Partnership Ownership
by Attorney Bethany K. Laurence
Your partnership agreement isn't complete without a buyout agreement stating what will happen when a partner leaves the business.
Many new partners neglect to make a buyout, or buy-sell, agreement, but they are critical to protect your investment in a partnership. When you create buyout provisions for your partnership agreement, you and your partners will be prepared if one partner wants to leave the business, or worse, dies, goes bankrupt, or gets divorced.
What Is a Buyout, or Buy-Sell, Agreement?
Contrary to popular belief, a buy-sell agreement is not about buying and selling companies. It is a binding contract between business partners about the future ownership of the business. Because of this confusion in terminology, we will use the term buyout agreement from now on.
A buyout agreement can stand on its own or can be several provisions in your written partnership agreement that control the following business decisions:
- whether a departing partner must be bought out
- what price will be paid for the departing partner's interest in the partnership
- who can buy the departing partner's share of the business (this may include outsiders or be limited to other partners), and
- what other events may trigger a buyout.
It may help to think of a buyout agreement as a sort of "premarital agreement" between you and your partners: Although you might think that your partnership will last as long as you all shall live, the buyout determines what will happen if things don't go exactly as you planned.
Events Covered Under a Buyout Agreement
Typically, the events that trigger a buy out of a partner's interest under a buyout agreement are:
- the retirement or resignation of a partner
- an attractive offer from an outsider to purchase a partner's interest in the company
- a divorce settlement in which a partner's ex-spouse stands to receive a partnership interest in the company
- the foreclosure of a debt secured by a partnership interest
- the personal bankruptcy of a partner, or
- the disability, death, or incapacity of a partner.
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Copyright 2006 Nolo
