Will You Actually Be Paid On Your LLC Or Partnership Buyout?

In New Jersey, negotiating a buyout of your member interest in a LLC, partnership, or closely-held corporation is an art. As such, you should insist on certain requirements if you will be receiving your money in installments. On paper, you could be receiving a substantial amount of money. However, have you fully protected yourself to ensure you will actually be paid, and have an enforceable agreement?

Every situation is unique. Therefore, strategies need to be tailored to the specific situation. That said, here are several things that I often include in buyout agreements:

• Adequate protections that will maximize the chances that you will receive those tail payments. For example, I may require that partners/members continuing to operate the business pledge their interests as collateral for the payments. Another consideration is to have them sign a confession of judgment. This could be used to go into Court and obtain the balance owed on the contract if they stop paying;
• One area to watch is where the agreement puts a post-closing obligation on you to keep matters confidential, or some prohibition on competition. These types of obligations could lead to breach of contract claims against you. I have seen situations where inexperienced counsel agree to have tail payments linked up with post-closing obligations on the recipient of the funds. This can be a recipe for mischief. It gives the payors the ability to tie up the payments for months or even years by making claims of a breach. Instead, wherever possible, it is smart to de-link the payment obligation from the post-closing obligations on the recipient of the funds. Instead, have a clear procedure in place for the rapid and inexpensive resolution of any claim of breach, along with a prevailing party clause giving the winner attorneys' fees, costs and arbitration fees. This should help to avoid specious claims of breach.
• Have a "change in control" provision in your agreement. You get paid immediately if the business is sold or majority control is given to a new third-party.
• Have a provision giving you access to the company's financials during any period in which you are receiving tail payments.
• Lastly, be sure to consult with an accountant on the tax treatment of the funds you are receiving. Further, get clarity on the date on which your obligations as a member/shareholder have ended.

The Goal

Think about these things when negotiating a buyout of your partnership, shareholder or LLC member interest. At the end of the day, to goal is to receive all of the money owed to you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.