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Protecting yourself in a buy-out

June 20, 2013


Question:

Jennifer,

I signed a shareholders agreement years ago and in that document I agreed to pay my partner a designated amount upon his retirement.  He just gave me notice and now I do not want to pay that much because I think the amount is over market value.  What can I do?

Your advice is truly appreciated.  Thank you in advance.
Dr. H

Answer:


Dr. H, this is one of those questions where I have to see your Shareholder's Agreement to give a proper answer.  However, based on the information relayed above, it sounds as though you have agreed to a certain price in your shareholder's agreement.  Accepting such language is absolutely not preferable, or standard.  A buy-out amount should be determined at the time a shareholder is "departing" whether voluntarily or involuntarily (death or disability).  Typically shareholder agreements provide the amount to be paid to a departing shareholder or their family or estate is determined by the regular accountant for the practice and based on the book value of the practice at that time.  Parties often agree to a formula the accountant will utilize to determine the proper buy-out amount.  Should withdrawal be because of death or disability, the amount to be paid may be covered by an insurance policy, if the parties have procured.  Here, whether you have an obligation to purchase at the designated price will be governed by the agreement.  Your recourse or ability to dispute the buy-out price also will be governed by the agreement.  And, similarly, your ability to avoid the buy-out or terminate will be governed by the agreement. 

A few general notes on this topic -critical to any potential buy-out language is understanding your potential responsibility should your partner withdraw for any reason.  Without a Shareholder's, Operating or Partnership Agreement, depending on your corporate structure, you will not have a defined obligation, or in the alternative, protection of buy-out language. And finally, the time to address your partnership is when times are good and status quo, not when a partner is looking to leave.

For a more detailed answer, send over your agreement for review.




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