A break-up of business partners is a difficult event, regardless of whether it is amicable or because the partners can no longer work together. However, a business divorce does not have to be painful as long as a prenup is in place. Terms for a business break up should be part of the agreement between the partners (an operating agreement for a limited liability company or shareholders agreement for a corporation). This agreement is ideally executed at the beginning of the business, during the ‘honeymoon’ stage, but partners can also agree to execute an operating/shareholders agreement at any time during the life of the business. The terms that should be considered related to a business break-up are:
There are a number of events that could make one partner desire to buy out the other partner, including death; disability; termination of a partner’s employment; or criminal conduct; foreclosure by a creditor; and in businesses where licenses are required, the loss of such license. The partners should think about the specifics of their business and their personal circumstances and decide if any or all of these events would give one partner the right to buy out the other partner.
Transfers to Third Parties
Ownership in a business is personal property and the partners should decide if ownership in their business is freely transferable, can never be transferred or, can only be transferred to a third-party after the other partners are given the first right of refusal. The partners should think about long-term plans for the business and their individual goals to determine what’s right them and the business.
Drag Along/Tag Along
For certain businesses, the value to a third-party buyer can only be realized by acquiring the entire business. In that circumstance the selling partner would want to have drag-along rights, which is the ability to force the other partner to sell (drag them along). On the other hand, a non-selling partner might not want to get left behind, stuck in business with a third-party buyer. In that circumstance, the non-selling partner would want to have tag-along rights, which is the ability to force the third-party buyer to also buy the non-selling partner’s ownership (tagging along in the sale). Again, here, the partners should think about the long-term plans for the business and their individual goals to determine whether drag-along and/or tag-along rights are a fit for them and their business.
When thinking through the circumstances of breaking up the business, the last, and often overlooked matter for partners to consider is when they just no longer want to work together. For this situation, the partners can agree to have a mechanism where one partner can simply decide to exit the business requiring the operating/shareholder agreement to include a put (forcing someone to buy) and/or a call (forcing someone to sell) that will allow the partners the ability to facilitate a break-up.
We regularly assist structuring agreements between business partners, which includes assessing the various break-up scenarios to find terms that best suit the partners plans and goals. If you would like assistance with structing an agreement with your business partners, you can contact us at 305.222.7282 or Info@Ser-Associates.com.
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