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Planning for a partner to leave the business

On Behalf of | Mar 23, 2018 | Firm News |

When you and your partners start a new business here in New Jersey, you probably think that you will work together well into the future. You form your partnership, draft a partnership agreement and open your doors, but what happens if one of your partners leaves the business at some point?

Now is the time to prepare for that eventuality even though none of you think it will happen at this point in time. A buyout agreement, also called a buy sell agreement, may be the solution. You might consider it as sort of a prenuptial agreement for your partnership.

What types of situations necessitate a buyout agreement?

One thing that everyone can count on in life is change. Regardless of each partner’s good intentions, life often gets in the way. The following situations would benefit from a buyout agreement:

  • One of your partners gets a divorce, and his or her spouse receives an interest in the business as part of the settlement.
  • A partner receives an offer he or she can’t refuse for his or her interest in the partnership.
  • A partner decides to retire.
  • A partner pledges his or her interest to secure a debt, and the lender forecloses.
  • A partner dies, becomes incapacitated or suffers a permanent disability.
  • A partner files for personal bankruptcy protection.

Any of these events could trigger the dissolution of the partnership without a buyout agreement in place.

What types of provisions need to be in in a buyout agreement?

When drafting a buyout agreement, you may want to consider the following questions:

  • How will you value the partner’s ownership interest upon leaving?
  • Who will be able to purchase the departing partner’s ownership interest?
  • Can someone from outside the partnership buy the partner’s interest?
  • Will you even allow a partner’s interest to be purchased if he or she plans to depart?
  • Which of the above events trigger a buyout?

After answering these common questions regarding these agreements, you may discover that you need to include other provisions specific to your partnership.

What legal requirements must the buyout agreement meet?

If any disputes arise, you will only have the words in your contract to rely on if legal action is necessary. Since a buyout agreement is a contract, it must adhere to certain laws in order to remain valid and to stand up to a New Jersey court’s scrutiny. It may be in the best interests of you and your partners to seek out the advice and assistance of an attorney to help make sure that happens.