These agreements come in many forms and many names: a business will, buy/sell, buy out agreement, or a business “prenup” all refer to the same document. It’s an agreement that provides for the orderly separation of partners for a variety of different reasons.
We have recently seen some very unfortunate scenarios where partners failed to memorialize their buy/sell or worse, never discussed it!
Recently a good client’s partner passed away. The deceased partner was a key salesman in the business. Probably the most important in the business. Our client was the operations genius. Well, the deceased partner’s spouse has just inherited her husband’s interest in the business. And she wants to work. Now this woman was absolutely lovely to deal with, but she couldn’t sell a hamburger! The business and my client, on an emergency with no life insurance funding had to:
a) value a business that just lost its key sales driver; b) fund a buy out of the inheriting spouse; and, c) come to an agreement with the inheriting spouse that he thinks respects the legacy of his deceased partner….way to much to deal with in a time of crisis.
Other questions that can arise here are:
a) can she sell her interest “on the open market”; b) what are her voting rights and can the voting rights be transferred; c) does the spouse need money quickly to pay any debts or inheritance taxes?
The best practice is to come to an agreement on the orderly winding down of a partnership, at the beginning of the relationship when everyone is on the same page.
Have you ever heard of a difficult situation that arose from a partnerships’ failure to have a defined buy/sell agreement?