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Home > Tools and Resources > Ask the Expert > Buyout Agreements

Buyout Agreements
Don't enter into a partnership without one!

By Richard Parker | Diomo Corporation
Contact Richard Parker | Visit Website | About The Author

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A friend and I are planning to buy a business together as a partnership. We have already created an LLC, but we were recently told that we should have a “Buyout Agreement” in place before we move forward. We are unfamiliar with this agreement, and skeptical about whether we need one since we are planning to run the business together, we get along very well, trust each other, and we then plan to then sell it together when the time is right. Can you offer any advice? I am also concerned that introducing this type of legality could hurt our business partnership before we even get started?

You owe a big “thank you” to whoever told you to get a Buyout or Partner Agreement. It is absolutely critical. It’s great that right now you both get along well and you share the same vision about running the business and what the exit strategy may be down the road. However, the reality is that things change in life, and do not always go as planned. What if one of you gets sick and cannot work in the business? What if one of you isn’t contributing, or wants out? What if the business goes through some difficult times and cannot support both of you? What if when the so called time comes to sell, one of you doesn’t want to? There are a hundred “what ifs” I can give you that could change your situation.

The beauty of a proper partnership agreement is that you get it drafted and never have to look at it again unless there’s a problem or dispute. This way, everything is pre-determined from how to value the business, to what happens if the business needs money and one partner cannot afford it, what happens in the event of the death of one partner, etc., etc.

Let me give you a perfect example. My brother and I owned a business for many years together. He and I have a very close relationship. I would trust him with my life, but he and I both agreed that if anything happened to either one of us, the last thing we’d want is having the other’s spouse as our new partner. Plus, we knew that despite our admirable intentions initially, businesses sometimes do not turn out as planed, and we absolutely did not want to allow a business deal to alter our relationship or tear apart our family. And so it just made perfect sense to lay it all out as best we could before we began, with the hope that we’d never have to revisit the document. The business was incredibly successful and luckily we never had to pull out our original agreement, but if we did, it was already done for us.

If you and your partner are 100% compatible, and feel completely confident that you share the exact same vision, then introducing a legal remedy to cure any problems should not in any way negatively impact your relationship. If it does, then you both may need to question your business partnership altogether.

As a final word, you should know that these agreements can be fairly standard, and there’s no reason to spend a ton of money on an attorney to draft one but you definitely should have it done by a professional. In fact, you and your partner can probably engage an attorney together, tell them your wishes and let them draft it for both of you (there may be some legal issues here about who the attorney represents so just double check this with them). There’s no need for this to be a controversial transaction. The whole idea is to have something that is fair, acceptable and equal to both parties.

Get more expert advice in Richard Parker's How To Buy A Good Business At A Great Price - the most widely used reference resource and strategy guide for buying a business.

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About The Author
Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.

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