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How may partners protect themselves from unwanted transfers?

On Behalf of | Mar 26, 2022 | Business Law |

Business partners may protect their ownership interests with contracts that include terms for an amicable exit. As reported by The CPA Journal, a buy-sell agreement preserves your rights as a business owner if an unexpected event causes a member of a partnership to leave.

A disability or an injury, for example, may compel a partner to sell his or her ownership shares to an interested buyer. With an agreement in place, the business or its remaining partners may have a priority right to purchase a departing partner’s shares. The purchase could prevent an unknown or inexperienced partner from taking control.

Provisions to help bring about smooth transfers

By including a clause noting a right of first refusal, a partner cannot attempt to sell shares to an outside party. Terms may describe how the business could value the stakes. A call-right clause may dictate that the business buys the departing member’s shares for a certain fair market value.

Terms may outline how buybacks affect remaining partners or allow them to buy additional shares in the future. Partners may also decide to add a deadlock provision that requires dissolving the business when a partner decides to leave. The business may then end regardless of how well its other partners are running it.

Common trigger events in buy-sell agreements

ThinkAdvisor notes how buy-sell agreements may describe specific events that trigger the obligations of a buy-out clause. A partner’s illness or injury may determine how much time he or she has to recover before triggering a sale. Incarceration, bankruptcy or losing a professional license could also affect a partner’s ability to contribute to a business’s continuity.

Individuals forming a new enterprise may plan ahead for unforeseen events. Buying back a partner’s shares could make a difference in a business continuing its trajectory under the control of its existing partners.

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