From the Nolo eCommerce Center
Your partnership agreement isn’t complete unless it governs what happens when a partner leaves the business.
Many business partners overlook a critical element of their partnership agreement that can save them both money and angst: buy-sell provisions. When you create buy-sell, or buyout, provisions for your partnership agreement, you and your partners can prepare for events that have been the downfall of more than a few successful small businesses – namely, the death, divorce, bankruptcy or retirement of one of the owners.
What Is a Buy-Sell Agreement?
Contrary to popular belief, a buy-sell agreement is not about buying and selling companies; rather, it is a binding contract between business partners. A buy-sell agreement is made up of several clauses in your written partnership agreement (or it can be a separate agreement that stands on its own) that control the following business decisions:
- who can buy a departing partner’s share of the business (this may include outsiders or be limited to other partners)
- what events will trigger a buyout (see the list below), and
- what price will be paid for a partner’s interest in the partnership.
It may help to think of a buy-sell agreement as a sort of “premarital agreement” between you and your co-owners.
What Events Should You Cover Under a Buy-Sell Agreement?
Your buy-sell agreement will instruct and remind you and your partners how you have agreed to handle the sale or buyback of an ownership interest when one partner’s circumstances change. Typically, the events that trigger a buyout of a partner’s interest under a buy-sell agreement are:
- 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 an ownership interest in the company
- the foreclosure of a debt secured by an ownership interest
- the personal bankruptcy of a partner, or
- the disability, death or incapacity of a partner.
For fill-in-the-blank buyout clauses and instructions on how to incorporate them into your partnership agreement, see How to Create a Buy-Sell Agreement & Control the Destiny of Your Small Business, by attorneys Anthony Mancuso and Bethany K. Laurence (Nolo.com).