There are benefits to partnership agreements but in certain situations, how good they will work for partners may be put to the test.
- A partnership agreement that grants obligations but not rights to a partner who has to move out may find it hard to sell his share if first right of refusal is also stipulated in it. He may offer his share but his partners may refuse to buy him out. Another buyer may not be willing to buy if share is minority.
If the partnership agreement has better exit options, the departing partner may not have to face such a difficult situation.
- Another case could be of partners who wish to force out another partner who was diagnosed with cancer and goes back to work on part-time basis while in remission. His equity is $1M, trauma cover paid him $500K and he is still entitled to a third of the profit even if his partners have worked extra hours to cover for him from the time of diagnosis.
A well written partnership agreement could have given the partners better options in dealing with the sick partner’s case. It could be one that allows them to compensate the ill partner for his equity after deducting the $500K trauma payment from the full amount due. Which means the sick partner would still have gotten full value after being forced out.
- A partner may find himself wanting to opt out but can’t force his partners to buy him out because the agreement does not grant that. Without a negotiation, he may not receive his full equity from the business.
In such a case, an agreement that provides better and more appropriate exit options would have been better for the partner who’s opting out.
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