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What Are Buyout Agreements?

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  • Written By: N. Madison
  • Edited By: Heather Bailey
  • Last Modified Date: 11 July 2014
  • Copyright Protected:
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Buyout agreements are legal contracts that set out terms for the purchase of an owner’s share of a business. In most cases, buyout agreements spell out a number of issues that are important when a business is sold entirely or one of its owners wishes to sell his interest in the business. This type of agreement usually stipulates when a partner has a right to sell his share of the business as well as the amount or percentage of compensation he will receive in such a case. In some cases, these agreements even stipulate who may buy an owner’s share.

When two or more people start or purchase a business together, the plan may be for the partners to continue running the business together indefinitely. Sometimes, that doesn’t work out as planned, however, and one partner wants to buy the other party out and continue running the business. In other cases, a new partner may step in to take the existing partner’s place. A buyout agreement may even prove beneficial when both parties in a business want to sell it, as it provides a guideline for each partner’s share of the proceeds.

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Sometimes buyout agreements are even useful in the event of a divorce. If divorcing spouses own a business together, they may need a legal agreement for determining the fate of the business. In some cases, these agreements may stipulate that one spouse will pay the other for his share and the paying spouse will retain complete ownership of the business. In other cases, the agreement may stipulate that the spouses will sell the business and split the proceeds. In such a case, this type of agreement typically specifies the percentage of the sale proceeds for which each spouse is eligible.

Often, buyout agreements also dictate what happens to a business if a partner becomes incapacitated or dies while he still owns interest in the business. Without this type of agreement, the remaining owner of the business may be forced to dissolve it or accept the partnership of someone who has inherited a share of the business. In some cases, court intervention may even be required to handle the end of a partnership that lacked a buyout agreement.

Typically, buyout agreements specify the price for which a partner may be bought out or the business may be sold. In some cases, the price may be a flat amount while in others it may be a percentage of the business’ current value. Sometimes these agreements even spell out who can buy a partner out or give a partner the right to approve or reject a buyer.

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