NFIB

When Partners Leave
08/ 26/ 2003

by Jeffrey Moses

When starting a new venture, whether it is a partnership, LLC or standard corporation, it might not occur to the founding principals that one of them will likely leave the business eventually. Instead of working out a complex financial arrangement with the other principals, simplify things by making a buy-sell agreement part of the initial operating agreement, which defines items such as type of business entity, names and titles of company principals and officers, responsibilities of all principals and officers, profit-loss sharing, etc.

A buy-sell agreement is not intended to specifically define dollar amounts of settlements between principals because at the time of start-up the future financial situation of the company will not be known.

Rather, the purpose of a buy-sell agreement is to determine the terms or methods of financial settlement. Normally, a buy-sell arrangement defines the method of financial settlement in one of the following ways:

Entity-Purchase Agreement: A departing principal is required to first offer his or her interest to the company as a whole. It is customary to state how far in advance of departure from the company a principal must notify the company. If the company declines purchase, or if terms cannot be agreed upon, the principal may then offer his or her interest to other principals individually. If the principals decline purchase or cannot work out a financial agreement, the interest may then be offered to individuals outside the company.

Cross-Purchase Agreement: A departing principal is required to first offer his or her interest to all remaining principals simultaneously. If all principals decline the purchase, or if terms cannot be agreed upon, the departing principal may offer his or her interest to outside individuals. It is customary to state how far in advance of departure from the company a principal must notify other principals in the company.

Since it will be impossible to determine a company's future valuation at the time of start-up, a buy-sell agreement may also state the methods for how the company should be valued.

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