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The business of partnerships
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Posted by icastillo Tue Nov 30, 1999 00:00:00 PST
Viewed 270 times
0 responses 0 comments By José A. Guerrero
Special to MÁS

Starting a business with a friend, relative or business acquaintance is exciting.
     But the promise of working together and building a successful business often makes it difficult to think about issues like partner disputes, death, divorce and other events that might threaten the viability of a business.
A “Buy/Sell” agreement is a common tool used to deal with these issues. It details how certain events will be handled between partners, such as:

• Permitted transfers of ownership interests
The rule of thumb between partners is that any transfer of their ownership interest in the business is prohibited. But sometimes transfers make sense.
For example, a Buy/Sell agreement allows for succession by children or longtime employees without the need for negotiations later, when bargaining power may be unevenly distributed between the partners.

• Prohibited transfers of ownership interests
There are certain transfers partners may want to prohibit.
A Buy/Sell agreement may prohibit the sale of one partner’s interest to a third party, or alternatively, trigger the right to purchase the interest by the non-selling partner. More importantly, a Buy/Sell agreement can deal with involuntary transfers that might occur because of divorce, death or bankruptcy, for example.
It is important that a qualified attorney counsel you with respect to these provisions as some transfer restrictions may be limited by applicable law.

• “Exit” clauses
Depending on the needs of the partners, a Buy/Sell agreement can provide a process by which to withdraw from the partnership, or for the other partners to expel a “problem” partner.
Business owners should be cautious when considering these types of provisions, and they must be drafted very carefully. They can result in a financial burden on the remaining partners if they are required to fund a buy-out. An improperly drafted provision could result in misuse, for example, when a partner finds himself expelled on the eve of profitability.

• Valuation
Perhaps the most important function a Buy/Sell agreement serves is to detail how a partner’s interest will be valued in the event of a buyout.
For example, the agreement may provide that the value will be determined by mutual agreement of the partners, by professional appraisal or pursuant to a detailed valuation formula to be calculated by the business’ accountant, just to name a few.

• Post buy-out promises
If structured correctly, a Buy/Sell agreement may provide the remaining partners certain protections against solicitation of business employees, customers or vendors by the selling partner. Similarly, Buy/Sell agreements may prohibit the selling partner from competing with the business of the remaining partners for a limited period of time and in a limited geographical location.
With the assistance of an experienced attorney, business owners can proactively address many unexpected events and help keep a business stable, even in the most difficult times. Klein Denatale Goldner’s Business Law Group has vast experience in all of these issues and is ready to help you with your business needs.
— José Guerrero is a partner with Klein Denatale Goldner. He specializes in business counseling, transaction and tax, intellectual property and real estate. He is also a member of the Hispanic Chamber of Commerce board of directors. 

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