As an owner of an Illinois small business, one of your top concerns should be the survival of your company if a partner in your company decides to leave, or if the partner dies, or any number of events occur that make it impossible for the partner to retain ownership in the company. If there is no exit strategy in place, the value of your company could be disrupted or you may end up losing the company completely. This is where buyout agreements come in.
A buyout agreement, also known as a buy-sell agreement, is a document that business owners should draft early on to determine how a partner’s ownership interest will be sold when a partner wants to leave, is incapacitated, or dies. One of the important components of a buyout agreement is that you can control who is eligible to buy a partner’s ownership.
Forbes points out that with a buyout agreement, you can dictate who can and cannot buy a partner’s ownership interest. For instance, you might want family members of the partner to be eligible to buy the interest if the partner dies or is disabled. Actually, you may only want specific members of the partner’s family to be involved, those that you believe are competent enough to make financial decisions. Conversely, you and your partner may agree that family members should not be involved at all and exclude them from consideration.
Buyout agreements also help prevent ownership from falling into the hands of a creditor. If a partner goes into personal bankruptcy, the partner’s ownership interest will be viewed as an asset by creditors. However, Findlaw points out with a buyout agreement, you can have the owner sell back his interest to the company in the event of personal bankruptcy. This prevents a bank from taking control of the ownership interest and possibly the company itself.
Additionally, buyouts can come into play if a partner should get a divorce. Since property acquired by a spouse during marriage is often treated as marital property, it is possible the partner’s former spouse may ask for and receive a share in the partner’s company ownership by a divorce court. However, a company buyout agreement can specify that the ex-spouse is required to sell that interest back to the company.
In short, a buyout agreement grants you wide latitude to control who ends up with an ownership interest in your company. Like any legal document, however, there is the chance that a court may not enforce the agreement if it runs counter to state law. Having an attorney look over the document can help ensure that the agreement is sound and will not be thrown out by a judge.