The Buyout Agreement

What Makes a Successful Partnership?

A successful business is dependent upon all of the individuals who make up the business team working together toward a unified goal. Many times, this goal can be as simple as generating larger profits. Each employee or member of the team is expected to do their part toward achieving the overall goal of the company. This scenario is particularly true when it comes to a partnership.

Why a Partnership May Need to Be Dissolved

A successful partnership depends more on the ability of the partners to operate together toward a common goal than any other type of business. A partnership is a unique structure in which each partner depends on the dedication and specialized skills of the other partners involved to build the business through cooperation and mutual effort. When one of the partners in the business does not hold up their end of the arrangement, or if they have differing views of what the partnership's direction should be, it can create a problem for the organization that might only be remedied through removal of that partner.

Importance of a Buyout Agreement

A partnership agreement will usually cover some degree of buyout language within the contract that dictates how the percentages of ownership will be calculated and disbursed should a falling out occur. Some partnership agreements do not provide such wording however, and when this occurs, the partners must evaluate the buyout transaction to determine the valuation of each partner's position.

Depending on the type of partnership that exists and the relationship the various partners have with each other, buyout agreements can range from simple and easy transactions to complicated legal events that can put a very real strain on the overall business. A partnership agreement that has buyout stipulations present will generally make the process seamless because all of the partners have read the agreement and indicated their understanding of its provisions with their signature.

When an Independent Valuation Professional Should Be Used

It is when a partnership does not have pre-existing buyout language in the agreement that determining valuation can become problematic. In this situation, many partnerships turn toward independent valuation professionals to determine the precise value of each partner's share and the best methods to disburse that portion of the business.

It is not uncommon for buyout agreements to be structured to protect the remaining partners from competition from the outgoing individual. Buyout agreements can be structured with an initial portion of the proceeds to be distributed up front with contingencies for structured payments to follow as long as the exiting partner conducts their affairs in a manner that does not harm the partnership. By doing this, the partnership can reduce any potential business risk they might incur from a departing partner by continuing payments based on that partner's behavior or on the continued success of the partnership.

The language governing the issuance of these payments can even stipulate that the amount to be released to the ex-partner depends entirely upon the performance of the business, thus encouraging the ex-partner to have a vested interest in its continued success.