It is time for things to change—that much you agree on. You or one of your business partners or shareholders needs to leave the business. How that will happen and what impact that will have on your business depends on the terms of your partnership agreement, shareholder agreement, or other business contract.
The Buyout Clause
Many businesses include a buy-sell clause—also known as a buyout clause—in their partnership agreement or business contract. It is similar in intent to a prenuptial agreement entered into before marriage. While you might expect your business partnership to last, it is important to plan for the future of the business if a partner or shareholder wants to leave or if the majority of partners or shareholders want an individual partner or shareholder to leave.
A buyout clause typically defines when a buyout may occur, who can buy the partner’s or shareholder’s stake in the business, and how the price will be determined. If there is no buyout clause, then Kentucky law determines how a business partner or shareholder may leave a business.
Possible Disputes When Someone Wants to Leave the Business
The terms of your buy-sell clause may have appeared clear when it was drafted. However, now that it must be applied, several possible disputes may arise. Specifically, one or more business partners or shareholders may disagree about:
- Whether there was a triggering event that allows the person wishing to leave the business to use the buyout clause of the contract. Most contracts explain when a buyout clause may be used. Some examples of triggering events may include disability, bankruptcy, divorce, retirement, or death.
- The terms of the buyout clause. The buyout clause may contain important information that goes beyond valuation of the business share being sold. For example, it could include information about non-competition or non-solicitation by the person leaving the business. How non-competition and non-solicitation are defined may be very important to the continuing business interests of all parties. For professional partnerships, the terms may also include the loss of a professional license, and the departing individual may not be allowed to sell an interest in the business to a non-professional.
- The valuation of the business. The value of the business must be established before it can be determined how much the business partner or shareholder should be paid pursuant to the buyout clause. This can be a significant area of dispute that requires various expert witnesses and extensive discovery to resolve. The value of the business may include ongoing deals or business that are difficult to value and should include an accurate assessment of all assets and debts.
- How payments will be made to the person leaving the business. Payments may be made in one lump sum or over a period of time. Both the person leaving the business and those continuing to run the business may have strong opinions about how payments should be made. If the buyout clause is silent on this topic or it is ambiguous, then it could be disputed.
Each buyout raises unique issues that can’t always be foreseen when the business contract was drafted. There is no cookie-cutter approach to resolving these issues. Instead, it is a complicated legal matter that deserves individualized attention.
Dissolving a Business
Sometimes a buyout is not a viable option. In these cases, a business may need to be dissolved. If the business is going to be dissolved, then it is important to:
- Value the business accurately. Do not trust your business partners or fellow shareholders to provide you with all of the information that you need to accurately value the business. Instead, make sure you have experts look at all the books and records to make a true assessment of value and to apportion the assets fairly after all the debts have been satisfied.
- Understand your rights going forward. If you want to continue working in the same field and in the same geographic area, then it is important to understand whether there are any legal limitations on your ability to do so and to take action to limit any restrictions before you proceed.
Your goal is simple; you want to end the business. However, the process of doing so can be complicated and it is important to protect your interests.
How to Protect Your Interests During a Buyout Dispute or Business Dissolution
If you are considering exercising a buyout clause, or if you have been notified that a business partner or shareholder will be exercising a buyout clause, or if your business is dissolving, then it is important to consult an experienced business law attorney to make sure that your rights are protected.
Important questions may arise—even during an amicable buyout—that could impact the amount you receive in a buyout of your business. Our attorneys spare no reasonable expense in preparing cases. We will make sure that you have access to the books and records that you need, and we will work with the tax specialists, financial advisors, and other experts necessary to protect your rights in an efficient and effective way so that you can move on. We will provide you with individualized attention while we work hard to protect your rights.
Please contact us any time via this website or by phone at 888-450-4456 to learn more about your rights. We are available around the clock, seven days a week.