A Detailed Guide to Writing a Buyout Agreement
Business partnerships include various important contracts, one of them being a buyout agreement. While you’re not legally required to have a buyout contract, it can be beneficial for your business’s future.
What Is a Buyout Agreement?
A buyout agreement is a legally binding document signed between business partners. It specifies the buyout details in case one of the partners wants to leave the business. Other common names for this contract are:
- Buy and sell agreement
- Buy-sell agreement
- Business will
- Business prenup
Any type of business structure can benefit from the buyout agreement, including LLCs, partnerships, and corporations. The contract defines what happens with the withdrawing partner’s interest after he or she leaves the business. The buyout agreement is useful in case one of the partners:
- Passes away
- Becomes disabled
- Goes through a divorce
- Declares bankruptcy
- Incurs debts
When and Why Should You Sign a Partnership Buyout Agreement?
While you can create a buy-sell agreement whenever you want, the safest option is to do it before entering a partnership. You will avoid numerous misunderstandings if you take care of everything in advance.
The agreement is useful for multi-owner companies since it protects the interests of the remaining parties. It ensures that the withdrawing partner’s share isn’t sold to an individual or company the remaining partners don’t want to work with. By specifying what happens if one of the partners leaves the company, the agreement allows other owners to continue with the business worry-free.
Another important aspect of the buy-sell agreement is a buyout valuation. An accounting professional will determine the value of the business by taking the following factors into consideration:
- Unpaid earnings
- Shareholder loans
- Owed profits
The valuation will help calculate how much the withdrawing partner’s portion is worth.
Most buy-sell agreements include a non-compete clause. This is important because it prohibits the departing partner from working for or becoming the competition. It also ensures the partner in question won’t develop business relationships with previous clients.
The buyout contract can also be created in single-member companies. In that case, the agreement specifies details regarding the sale of the company. This ensures that the business continues even if the primary owner retires or passes away.
What Happens if You Don’t Write a Buy and Sell Agreement?
If you don’t create a buy-sell agreement, you allow anyone to buy the part of the departing partner’s share. You might end up working with someone you don’t like or trust, which could jeopardize your business.
When it comes to single-owner companies, the lack of a buyout agreement means that the state your business is registered in can dissolve the company. You could face disagreements regarding your share’s value.
Learn How To Draw Up a Buyout Agreement
You can create a buy-sell agreement in a few ways:
- Hire a lawyer
- Find buyout contract templates online
- Write the agreement yourself
While hiring a lawyer might seem like the easiest and safest solution, not everyone has the means to do it. Contract templates could be a good option, but you need to ensure the agreement fits your business needs.
If you decide to draw up a buyout agreement yourself, you should still check out some templates to learn how to structure the contract. While each partnership is different and requires a unique buy-sell agreement, there are some basic questions you should answer:
- What are the events that can trigger a buyout?
- Who has the right to purchase the withdrawing partner’s interest—current partners, family members, or a third party?
- How much money will the departing partner get for his or her interest?
- What are the payment terms? Will the buyer of the share pay a lump sum, or will your company accept installment payments?
Make sure to include each signing party’s names, addresses, and signature.
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