You do not want your upcoming divorce to cause the end of your business, but if your spouse has an ownership interest in your enterprise, you might have a serious problem. In some divorces, business owners have to sell off their companies to provide their spouses with their share of the business value. This is where a buyout agreement may save your business.
A buyout agreement permits you to buy out the ownership interest of a business partner or co-owner in certain scenarios, which may include a divorce. Generally, business partners and co-owners work out buyout agreements during the formation of the business. Forbes explains how buyout agreements generally work.
Valuing a business
A good buyout agreement should have a system in place to valuate the company. This is crucial to making the buyout work, as the partner must believe he or she is getting a fair deal. Because there are different ways to valuate a business, there is potential for partners to clash over this issue. This is why some people choose to have a third party valuate the business for them.
Paying a partner
A buyout agreement should also detail how you would pay your co-owning spouse. Some agreements provide for a lump sum payment, but this may be difficult if you own a small business since a large payment may drain your business assets. As an alternative, your agreement might let you pay out your spouse over a period of time. Some agreements keep a partner in the business for a period of time as part of a transition period.
Financing the buyout
Buying out a partner can actually devastate a business if a buyout agreement does not address how to finance a buyout. You may have enough assets to complete a buyout without hurting your company, but if not, your buyout agreement may have to structure the buyout with a loan. Owners who go down this route should understand whether their company can service a large debt. If not, taking out a sizable loan can bankrupt the business.
Finalizing the agreement
Completing the buyout may become a complicated process. You want your buyout to comply with the laws of the state so there is no doubt that your spouse no longer has any ties to your business. A buyout agreement should follow the law as it pertains to partnerships or whatever business structure your company has so that a judge does not rule that your buyout violates state law.