Operating a successful business with a friend or associate can be a rewarding experience. However, there may come a time where you or your business partner would like to retire or seek other ventures. When this happens, you will be relieved that you drafted a buyout agreement that you can refer to resolve the situation. If your business requires legal assistance drafting a buyout agreement, contact an experienced Baltimore buyout agreement attorney today.
The Heyman Law Firm is dedicated to providing you with the legal representation that you deserve to operate your business efficiently. Failure to have a buyout agreement can result in a number of issues when one business partner needs to buy out another partner. To schedule a confidential legal consultation to discuss your case, contact the Heyman Law Firm at (410) 305-9287, or contact us online.
How Buyout Agreements Work
A buyout agreement is a contract between the partners of a business that determines how a partner’s interest in the business can be bought. Buyout agreements are typically part of the operating agreement for a business and should always be considered due to the unforeseen circumstances that could cause a partner to leave the business.
Every buyout agreement should discuss a number of topics:
- When a business owner can sell their interest in the business
- Whether the purchase of an owner’s interest is limited to members of the company, third-parties, or both
- The value of the company and the business owner’s interest in the company
Valuation of an Owner’s Interest
Determining the value of the business and the value of an owner’s share of a business is one of the first issues that should be handled when performing a buyout. As the owners of a business may disagree regarding the value of a business, many companies choose to hire a third-party accounting firm to value the company. The accounting firm should thoroughly examine the company’s profits, expenses, debts, and other factors to determine the fair market value of the business.
Many business owners will wait until the financial situation of the business is at its peak before requesting a buyout. If the business partner owns a considerable share of the business and departs when the company is performing optimally, this can have a serious impact on the business. It is important to set terms of when a partner can be bought out.
To avoid some financial disputes regarding a buyout, the owners of a business may draft a “shotgun clause” into the agreement. A shotgun clause permits an owner to make an offer for the shares of their business partner at a particular price. The offeree has the option to accept the offer or decline the offer and purchase the offeror’s shares at the same price. This would dissuade an owner from attempting to low-ball their business partners for their share of the business.
If a company permits the buyout of a business by a third-party, there are many other factors that should be considered. For example, a buyout agreement should address whether a third-party can buy a share of a business that also grants them the ability to participate in business decisions — selling a share of the business to a third-party that has different goals than the remaining business owners can cause problems for a company.
Events that Can Trigger a Buyout Agreement
A buyout agreement can be triggered under several circumstances. Many business owners will opt for a buyout when they believe it is time to retire. However, there are many other reasons why a buyout is initiated:
- A third-party makes a lucrative offer for an owner’s share
- A business owner is in the midst of a divorce, and their share of the business must be divided between their spouse
- A partner has filed for bankruptcy
- A partner has become incapacitated and cannot make business decisions
- The death of a partner
A thorough buyout agreement should consider all the possible future issues that could lead to a business owner departing from the business. Operating agreements that do not contain a buyout agreement can cause the owners of a business to possibly become entangled in complex litigation to decide the correct value of an owner’s share of the company. A buyout agreement can also be drafted separately from the operating agreement if the owners of a business can agree on terms.
There are various other issues that must be reflected upon when performing a buyout, like whether the company will continue without a partner or dissolve. If a company choose to dissolve after a buyout, then the partners should also discuss details regarding the winding-up of the business.
Consult with an Experienced Maryland Buyout Agreement Lawyer Today
If you require a buyout agreement for your business, contact an experienced Maryland buyout agreement lawyer today. The business advisory lawyers at the Heyman Law Firm possess a wealth of experience litigating a wide range of business law cases, and we are prepared to use this knowledge to represent you. To schedule a confidential case evaluation, contact the Heyman Law Firm at (410) 305-9287.