Partnership agreements are written documents that explicitly detail the relationship between the business partners and their individual obligations and contributions to the partnership. Since partnership agreements should cover all possible business situations that could arise during the partnership's life, the documents are often complex; legal counsel in drafting and reviewing the finished contract is generally recommended. If a partnership does not have a partnership agreement in place when it dissolves, the guidelines of the Uniform Partnership Act and various state laws will determine how the assets and debts of the partnership are distributed.
Agreement The buy-sell agreement is one of the most important elements of any partnership agreement. Lance Wallach summarized the problem in an article for Accounting Today: "Large problems can result from the death, incapacity, resignation, etc., of one of the owners," Wallach wrote. "How would the decedent's heirs liquidate the business interest to pay expenses and taxes? What would happen if an heir or an unknown outside buyer of the decedent's share decides to interfere with the business? Could the business or other owners afford to buy back the decedent's ownership interests?"
A buy-sell agreement is intended to forestall all such problems. In essence, it specifies the terms of a buyout in the event of death, divorce, disability, or retirement. The buy-sell agreement has become a "must" in many instances in which a partnership is seeking financing—a loan or a lease. Lenders want to see the agreement and study its provisions.
The two primary structures for buy/sell agreements are cross-purchase agreements, in which the remaining partnership owners buy the departing partner's stock or partnership interest, and the stock-redemption agreement, in which the company buys the stock of the departing owner. Life insurance policies are the more typical technique employed to ensure that funds are available for cross-purchase transactions. With two partners in a business, the solution is very straightforward but requires more ingenuity to set up with multiple shareholders. With stock redemption agreements, on the other hand, the insurance would be written in favor of the company. One of the benefits of a buy-sell agreement is that, with the partners able to reach agreement, more innovative methods of solving the problem can be worked out and codified.
Bentley, Ross. "Live in Peace with Your Contract." Caterer & Hotelkeeper. 11 August 2005.
Blaydon, Colin, and Fred Wainwright. "Survey: GPs and LPs Support Idea for Model LP Agreement." Venture Capital Journal. 1 July 2004.
Dunn, Ross. "Ye of Little Faith." People Management. 27 April 2000.
Spandaccini, Michael. "The Legal Ins and Outs of Forming a Partnership." Entrepreneur. 2 June 2005.
Wallach, Lance. "Buy-Sell Agreements Can Help Protect Your Business." Accounting Today. 7 November 2005.
Weisz, Richard L. "Breakup of Business Partnership isn't Easy Thing to Do." Business First-Columbus. 1 December 2000.
Zaritsky, Howard M. Structuring Buy-Sell Agreements. Warren Gorham Lamont, 2005.
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