Every partnership, no matter how successful, needs an exit strategy. In addition to one partner simply "wanting out," the bankruptcy, divorce, and even death of a partner can also have a significant impact on the business, particularly if you fail to plan ahead.

While no one wants to enter a partnership planning for the worst, there are several advantages to having a buy-sell agreement in place. Most importantly, having agreed upon procedures in place avoids costly and often protracted disputes down the road. Even in the most amicable business relationships, determining the fair value of a partner's interest/contribution can be contentious.

The issues are even more challenging in a hostile buyout situation. If the partners cannot resolve a dispute, the court may, in some cases, dissolve the partnership altogether.

Buy-sell agreements are typically included in a larger partnership agreement. However, if your contract does not contain one, you can still draft a buyout agreement after the fact. At minimum, it should address the following issues:

• Events triggering buyout:
  The agreement should list all of the circumstances in which a buyout may occur. Covered events may include the retirement or resignation of a partner, divorce of a partner, personal bankruptcy of a partner, and death, disability, or incapacitation of a partner.
   
• Permissible buyers: The agreement should list who may buy the departing partner's interest. For example, if the buyer is not limited to current partners, you may end up running your business with a stranger.
   
• Valuation of partner's interest: The agreement should specify how the departing partner's interest in the partnership will be valued and the terms of the payment. The most common valuation method is to obtain a professional appraisal.
   
• Confidentiality and non-competition: The agreement may restrict the business activities of the departing partner by limiting the disclosure of trade secrets and other proprietary information, as well as prohibiting the partner from working for or launching a competing enterprise for a specific time period.
   
• Tax implications:
  The agreement should also address how the taxes associated with the buyout payments will be treated. For instance, some buyout contracts specify that the payment of taxes will be treated as a distribution.
   
• Arbitration: The agreement should state whether alternative dispute resolution methods, such as mediation or arbitration, are required. Otherwise, the dispute may proceed directly to court.

How We Can Help

Our seasoned business attorneys can guide you through the process of negotiating a buy-sell agreement that protects the future of your partnership. Contact us today to schedule an initial consultation.