Buyout Agreements

Save

Buy-sell agreements, sometimes called buyout agreements, are legal agreements between two owners of a business specifying how one owner can buy the other owner's interest. If you are thinking of buying out a partner or selling your portion of a business, review the important key components of a buy-sell agreement. If you just formed a partnership, now is the time to develop a buy-sell agreement to protect each of your interests in the business.

Key Conditions

  • A buyout agreement should clearly specify under what conditions a partner is allowed to sell his interest in the business and who will be allowed to purchase part of the business. For example, if an owner has a serious health condition, he could be permitted to sell the business. "Serious health condition" must be clearly defined. Other situations that can arise would be divorce, death, bankruptcy or retirement.

Price Conditions

  • One key component of the agreement is the valuation of the business. The buyout price can be fixed and that amount is specified. Another option is book value, which is the value of the business shown on the balance sheet less any depreciation that has accumulated. Most businesses have value higher than book value. For example, there's added value from the number of customers a business has and related goodwill. Because of this, another valuation technique is to use a multiple of book value. In many industries, there is a standard guideline for what multiple to use. Since every business is different, industry guidelines should only be used as a starting point. Another valuation technique is to have the business appraised at the time of buyout by a professional appraiser. This allows for the final price to reflect changes in the marketplace.

Other Considerations

  • The buy-sell agreement should specify if the seller of the business is obligated to spend additional time working in the business after the transaction is complete to insure a smooth transition in the business ownership. The agreement should also indicate how payments will be made for the buyout. Will a lump-sum payment be made or a series of payments over time? Will the buyer be charged interest for the right to make payments over time? The remedy the seller has should the buyer not make payment on time should be indicated.

Confidentiality Agreement

  • The partner selling the business should agree that he will not disclose company confidential information to outside parties, such as competitors, and that he will not retain confidential company information, such as a customer list. It is common practice to ask the partner selling the business to not work for or begin another business that directly competes with the business he is selling for a specified number of years.

Related Searches

References

  • Photo Credit PhotoObjects.net/PhotoObjects.net/Getty Images
Promoted By Zergnet

Comments

Resources

You May Also Like

  • Definition of a Lease Buy Out

    A lease buyout can be an easy process, depending on what each party wishes to accomplish during the transaction. Some buyout options...

  • Standard Purchase & Sale Agreements

    Real estate standard purchase and sale agreements vary from state to state. However, despite the differences in some of the language the...

  • How to Write a Buyout Letter

    Breaking up is hard to do, and when writing a buyout letter, not only are you notifying the other party that a...

  • How to Write a Buy-Sell Agreement

    If you are in business with a partner or partners then you definitely need to write a buy-sell agreement (also referred to...

  • How to Write a Buyout Agreement

    When you enter into a business arrangement, one of the last things you may be thinking about is selling your share of...

  • Purchase Agreements for Real Estate

    At the end of the day, a real estate sale is no different from any other sale. Whether it is a house...

  • Buyout Options for LLC

    LLCs, or limited liability companies, are a form of legal structure for small and mid-sized businesses. Each owner of an LLC is...

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!