How Do You Buy Out a Partner from a Business? | Attorney Aaron Hall

How Do You Buy Out a Partner from a Business?

In this video, you get answers to these questions:

  • How do you buy out a partner from a business?
  • Why is it vital to have an agreement about how the transition is handled?
  • What is a buy/sell agreement?
  • Can this apply to an LLC and a Corporation?
  • How do you buy out a partner from a business?
  • What are the best practices when negotiating a buyout?

Video Transcript

How do you buy out a partner from a business? Does it matter if you have a buy-sell agreement? I’m Aaron Hall, a business attorney in Minnesota. I work with a lot of business owners, and one thing we know is that every business owner eventually leaves a business. Maybe it’s by death, maybe it’s before that, but we know business owners leave a business. So when there are multiple owners in place, it’s vital to have an agreement regarding how that transition out of a business is handled.

Now, I was recently asked a very interesting question by a business owner. He said, “I’d like to buy out one of the other business owners. How does that work? What do I have to pay him? How do we get him out of here? Because it’s not working to have that other business owner in this company.” Now, the good news is, they had a buy-sell agreement. What is a buy-sell agreement? Well, it’s simply an agreement that explains, “How do you handle if one person’s going to buy out another person?” Maybe
it’s because somebody passed away. Maybe it’s some other circumstances.

Generally speaking, a buy-sell agreement does not require somebody sell. It simply handles the sale process if somebody wants to sell or somebody sells involuntarily. You might be wondering, “What’s an involuntary sale?” Well, that’s death. You didn’t try to sell, but you lost ownership by passing away. Bankruptcy. You didn’t try to sell, but when you filed for bankruptcy, you had to give up things you owned. Divorce. Incapacity. These are examples of involuntary transfer of ownership of a company.
Now, this applies to an LLC where you have an ownership interest as a member. That’s often called units. It also applies to a corporation, where you have ownership in the form of shares that you own, or share certificates that you have.

Now, because usually you cannot force somebody to be bought out, the question is, “How do you buy them out?” Well, there may be a process in the buy-sell agreement, but usually what is involved is going to that owner and saying, “I’d like to buy you out.” Now, here’s the best practice. In a small business, it’s always best to have all of the owners sign off on the agreement, so that means you have a negotiation first and you talk about, “What are the terms? What would you be paying to buy that person out? Does anyone else want to buy interest in this?” If there are other owners, for example. Typically if one person is being bought out, all the other owners will share in buying out that owner and that way they protect whatever their ownership percentage of the company is. But sometimes an owner may not have money and so they say, “You know what? I’m not interested in buying out a percentage of that owner who’s selling.” The best practice, though, is to get every owner to sign off on it.

Now, you can look to the terms of a buy-sell agreement, but because of the close relationship between owners, often these owners are friends. Many times they’re family members. In a family, it’s especially vital to preserve harmony in the family that the owners talk through these issues and negotiate a deal that makes sense to everybody.

Now, here are a couple other pitfalls. Often after a sale occurs, the seller or the buyer has some remorse. The buyer might say, “I paid too much.” Or the seller might say, “I didn’t get paid enough.” Maybe the company does really well after the sale, and the seller’s going, “Ugh, if I only had waited to sell. You guys didn’t tell me what great opportunities we had in the pipeline, and if you had told me that I wouldn’t have sold for the price I did.”

These are the kind of problems that we want to avoid as attorneys by making sure the deal is done well. One important way to do that is make sure both the buyer and seller have full access to the financials of the company, and all the material information, all the important substantial information about how the company’s doing. Threats, lawsuits, weaknesses, as well as strengths, opportunities, sales and deals in the pipeline. All of that should be disclosed in advance, and also both parties are protected if the parties are represented by attorneys. Because when a party is represented by an attorney, they have a harder time saying, “Hey, I didn’t understand. I wasn’t sophisticated. I didn’t know what kind of deal I was signing.” The courts will look at it and go, “You were represented by an attorney. You paid a professional to handle this deal.” And so it is harder to undo a deal when there are parties represented by attorneys when the deal is done.

For more pitfalls and tips, you can go to the link below, which links to my website at aaronhall.com. Please keep in mind this is general information to help you spot issues to discuss with your attorney. There’s a disclaimer in the description below that explains more, but please don’t rely on this except as a way to spot issues to discuss with an attorney who is representing you. For similar videos like this, you can subscribe to this channel, you can subscribe to our email list and visit more information at aaronhall.com. Again, I’m Aaron Hall, an attorney representing business owners in Minnesota.