When a company is owned and run by two or more entities, they establish a legal relationship by becoming business partners, sharing in the profits of the business. There are many different types of partnership agreement, and most partnerships will include provisions that spell out partnership buyout agreements. Think of these as corporate prenups.
A partnership buyout agreement (sometimes referred to as a buy sell agreement) is important because it sets out clear rules in advance that define whether or not a partner needs to be bought out, the fair market value that must be paid for the departing partner’s interest in the business, what events will trigger buyouts, and even include clauses about who can buy any departing partner’s share in the business.
Below we’ll discuss the details, as well as the ideal types of buyout finance that can be used when the ownership interest of a departing partner needs to be acquired.
What events are typically covered by a partnership buyout agreement?
There are several common reasons that a buyout provision will be triggered.
For example, a business buyout agreement might occur when one partner leaves, retires, dies, or otherwise finds themselves incapaitated. Business buyout agreements could also be triggered by a very lucrative offer from someone outside the company, one who wishes to purchase a partner’s interest.
Another potential scenario would be if one partner experienced a personal bankruptcy. The divorce settlement of one of the partners could also trigger a buyout, but only if that partner’s ex wife or husband stands to receive interest in the company.
Why are partnership buyout agreements important?
Partnerships don’t always end in the manner in which you expect them to, so it’s important to have a buyout agreement written down in advance in case circumstances suddenly change.
If the partnership must be dissolved, dividing assets and profits should be clear, and described in advance in legal documents to avoid any delays or unnecessary acrimony between partners. Lawsuits can be expensive, and you need a buyout agreement in place or risk the loss of your company if things don’t go well.
In addition, partnership agreements are important because they define who can buy into the partnership. Even if one partner leaves under friendly circumstances, without a clear plan and a binding contract in place, you might find yourself running the business with a new partner, one you would rather not share management responsibilities with.
What is the best way to fund a partnership buyout?
Because every situation is different and every company is somewhat unique, the buyout financing that funds the purchase of a partnership interest will always depend on the specific circumstances surrounding the departure of a partner.
My business wants to acquire another company, but we don’t have the cash on hand. How can we fund this acquisition?
Sometimes, acquiring a new business or a competitor can be an amazing opportunity to grow your small- or medium-sized business. However, SMBs don’t always have enough working capital to make the purchase (or to fund the buyout of the partners in that business), so they look to companies like Accord Financial to fund their buyout and acquisition finance.
Accord focuses on asset-based finance services, offering the liquidity SMBs need through customized business acquisition loans and financing.
What value does Accord bring our company as we acquire another?
SMBs can face a number of obstacles during the purchase of an existing business, including complex legal agreements (such as partnership buyouts), difficulties with contracts and leases, handling the new employees, and more. Things are complicated enough, and Accord makes sure that financing is not a problem.
Accord provides simple and easy-to-understand financing based on the assets of the business you are acquiring; the accounts receivable, inventory, machinery, equipment, and (in certain circumstances) real estate. Accord does not rely on financial covenants that can constrain your flexibility in operating the business. Instead we allow you to focus on the opportunities of your growing business, leaving the financing to them.
Want to learn more? Contact Accord today to learn more about business acquisition loans, small business loans, and other finance options.