Plan Ahead for Changes in Partnership Ownership
by
Bethany K. Laurence, J.D.
A buyout agreement lets you plan 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 confusing 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 "prenuptial 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.
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