Buy-Sell Agreements: A Prenup With Your Business Partners?

Much of my litigation practice relates to business partners who get in a fight and want to split up. 

The urge to split isn’t what typically causes an expensive dispute and litigation – instead, the dispute arises in relation to HOW the split is going to take place (who should walk away, who gets paid, how much does he or she get paid?). 

If these partners had created a “buy/sell agreement” either at the creation of the business, or at some  later point while still on good terms, there probably wouldn’t even be a dispute.  They would simply look at their agreement, calculate who gets paid and how, and move on with their lives.

A buy/sell agreement allows business owners to agree to what will happen if one of the owners either chooses to leave, or is forced to leave. 

Business partners part ways for all kinds of reasons, both good or bad, or right or wrong.  Examples include:

• One of the owners wants to retire or change industries,
• One of the owners gets divorced, and his or her ownership portion of the company gets awarded to the ex-spouse, or
• One of the owners passes away suddenly.

With a buy/sell agreement in place, the owners have already agreed upon what’s going to happen if a split occurs.  The owners can agree to very specific details as well, including limiting the sale of the ownership to certain parties, or granting a right of first refusal to the remaining owner/s. 

Another benefit of such an agreement is that the owners can list a calculation for how to value the buyout. 

It can even specify how the buyout will be paid for, whether through existing cash on hand, future proceeds, or potentially even from the proceeds of a life insurance policy where there’s a death of a partner.

As mentioned above, these agreements can be entered into at the inception of the business, or at some later time if the parties are willing to agree.  And just as most other terms in the partners’ operating agreement, they can be modified or amended as well.

Properly written agreements that clearly layout the rights and responsibilities of a business relationship will minimize disputes and allow people to work together and plan for the future. 

Whether looking to form an LLC, corporation or other entity, Goosmann Law Firm can work with business owners to make sure that they have proper agreements in place, and that those agreements accurately reflect the nature of their relationships.