What happens when the structure of a two-party Partnership Agreement doesn’t allow for the sale of business interest without the permission of the other Partner? Life can get difficult! What options would you have left? Either you A. sell the share of your interest in the business to your partner, B. you buy your partner’s interest, C. you continue your business relationship, or D. you force a dissolution of the business in court.
Here are the steps to take:
- Identify all assets/liabilities, and attempt to come to a buy/sell agreement with your Partner.
This step also includes identifying all contracts, liens, mortgages and other obligatory documents that name you or have you acting as a personal guarantee or surety. You will also need to balance Capital Accounts, which track both partners contributions and loans.
- Based on the above information, negotiate departure terms
Don’t forget to calculate for goodwill, having a familiar customer base, having high percentage of repeat sales, strong management with few key personnel, and having no pending legal/government actions. As you need to shoot for financial ratios that are near or above industry average, it may be advisable to have a business appraisal done. A simple “by the tax forms and books” appraisal will cost anywhere between $1200-$4000. A more thorough appraisal can cost anywhere between $5000 and $50,000.
- Have yourself removed from all obligatory documents and/or where you are a personal guarantee or surety.
- Draft a Separation Agreement/Bill of Sale that documents everything, and have it executed properly by the yourself and your Partner. This document needs to include:
- a. The price paid for the business interest, and how it’s paid (if some form of payment terms apply)
- b. How the seller will have their name removed from any obligatory documents
- c. Indemnities for the departing partner (it is very important to ensure the seller is held harmless for future lawsuits and harms
- d. A security interest to cover any outstanding monies owed, debts or other obligations that cannot be removed
e. A clause covering material breach, should the Company not be able to cover its obligations
- f. A confidentiality clause
- g. And possibly a non-compete clause.
- Finally, make sure your name is removed from all formation documents, including but not limited to the Operating Agreement (for an LLC) or Bylaws / Corporate Register (if a C-Corp or S-Corp), Articles if your name is listed on the Articles, and with the IRS, if your name was used as the “Responsible Party” when your FEIN was obtained.
If your Partner refuses to Buy/Sell, the option left on the table is to force a dissolution under Virginia Code § 50-73.117(5) upon grounds that: (a) The economic purpose of the partnership is likely to be unreasonably frustrated; (b) Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (c) It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.
The Court will defer to the partnership agreement and will only permit dissolution where the circumstances fit the above statutory conditions.
How our Law Firm can help: Consulting a Business Law attorney is vital to help you through the dissolution process, draft a dissolution agreement, protect you from any future claims, or represent you in ensuing litigation. Give my office a call at (540) 721-6028 if you have questions about how we may assist you.