Things to Know About Partnership Buyouts— Part 2

Chris, 

If I tell my partner that he can buy me out for $60,000 (way less than my half is worth) and he turns me down, doesn't he have to let me buy him out for the same price?

Shotgun Buyouts

The question refers to what is called a shotgun buyout. If a buyout is rejected, the partner who rejects the offer must make the same offer to the partner who made the first offer. Let's clear this up.

Assume that you and I are partners. Our business is probably worth $500,000. If I offer to let you buy me out for a mere $100,000, and you reject the deal, then you must allow me to buy you out at the same $100,000 price. That's called a shotgun buyout. Even though I hate shotgun provisions like that, they can work. If I offer a very low price you better take it or I will get to buy you out at the same low price. The only good thing about shotgun buyouts is that they always end quickly with a buyout. But what happens if neither party can afford a buyout? That can be a messy way to force a separation of partners. What happens if I just want out? The business is failing and don't want the debt to land on me. I offer to sell you the business for $1. You say no. Now I must buy your interest for $1. You escape, the debts fall on me.

So, to answer the question, there is no legal requirement to buy a partner's share under any circumstances. Just because I want out doesn't me you have to buy me out.

#6 There is Nothing in Law Giving a Partner the Right to Force His Partner to Buy His Share

TRUE

Neither partner can be compelled to buy the interest of another partner. You can have the opportunity to leave at a fair price if you create a Partnership Agreement specifying the terms. It's that simple. Just be sure to protect each other and the business from a partner demanding a buyout if the business falls deep into debt.

You could create a clause that says something like, " if a partner would like to leave the business, after submitting his request in writing, his share will be redeemed for amount equal to 6 times the profit of the most recent 2 months." That accomplishes several things. First, it gives partners a way out if they need to leave the partnership. More importantly, it sets the price in advance. No arguments. No fights over price. 

Please note that I am giving an example only. The goal is to set a buyout price in advance. If your partner approaches you about buying your interest, you are not bound to that deal. You can negotiate. We want to make it possible but not easy for a partner to bail out.

 #7 A Verbal Agreement Is as Good As a Written Agreement

TRUE (ugh) and FALSE

Yes, verbal agreements are legal and binding. But, in contracts, and a Purchase Agreement is a contract, the details are very important. Rarely can all the details needed to complete a partner's buyout be verified using a verbal agreement. It's a good idea to get it all in writing.  Would you spend thousands of dollars and suffer years of stress to battle out a verbal agreement in court? Don't.

While verbal agreements are legal and binding, they are difficult to enforce. If someone backs out, the other party will have to prove the existence of a verbal agreement. 

Don't try to be clever and dupe your partner into accepting a verbal deal. It takes more than just "okay" to make a deal binding. 

"If the price is right, would you let me buy you out?" Your partner responds, "Yes!" That doesn't mean you have a deal. And, you can't claim that buyout discussions are open because your partner agreed to a buyout. I get at least one call a week about this. "My partner agreed to a buyout and now he won't talk with me about it." 

#8 If Your Partner Will Not Discuss Buying You Out, You Can Force the Closing of the Business

FALSE

You can force the end of the partnership, but your partner can elect to continue the business. One partner in a 50/50 partnership cannot force the business to close. That's why it's always a good idea to make big structural moves carefully. Again, having a Partnership Agreement will avoid this issue. It's worth the time and effort to create one.

#9 Partners Need Lawyers to Draft all Agreements Between Partners

FALSE

If you and your partner agree that each partner will have a spending limit of $1,000 per month, and you draft that as a resolution stating that, you then have a binding, legal agreement. Does having a lawyer draft it make it "more legal"? No. However, lawyers are trained in matters like this and will draft your agreement more precisely.  Lawyers are a bit like insurance. The value of a lawyer isn't in winning your case in court; it's in helping you avoid the need for court!

"When a partner decides to leave a business, it can cause a lot of turmoil. Ideally, the business can support a buyout, but when it can't, escaping the partnership is difficult. When the Operating Agreement specifies how a buyout is to be conducted, the process is much easier. Problem is, few partnerships have a proper Operating Agreement to govern a buyout."