Imagine you and your partner form an LLC. You sign an operating agreement. Several years later, the business is worth several million dollars. Your partner falls on hard times and needs to cash his share of the LLC out. What do you do now? At this point you face the following issues, just to begin with:
1. You have no agreed upon mechanism for valuing your partner’s share of the LLC.
2. You have no prior agreement as to how the cashing out partner is entitled to receive his payment. Should it be all in cash? Can the LLC execute a promissory note?
3. Does the LLC cash the partner out or do you personally buy the partner out with your own funds?
If you have no Buy-Sell Agreement, you have no agreement on any of these points!
If your partner wants to be obstinate about agreeing on terms, he/she can make it very difficult to come to an agreement, if not impossible. If you can’t resolve the matter, you two will be stuck together forever!
The Buy-Sell Agreement is often likened to a pre-nuptial agreement signed prior to marriage — it’s the document that sets the tone for the “company divorce” negotiation and provides a mechanism for LLC membership interest redemption or buyout. Without it, there is no starting point for the negotiation, and the partner demanding a buyout can ask for the moon and drag you into court to judicially determine how much money he/she is entitled to!
Don’t let this happen to you. Get a Buy-Sell Agreement and pick the right buyout mechanism for you.