Key Provisions For Sale Agreements For Retiring Partners

Mandatory Retirement Age

Many businesses employ this provision to provide for a smooth  and predictable transition between senior and junior ownership interests in a family context.  Even in non-family contexts, this provision has many advantages. 

Limits On Activities and Contact With Clients After Retirement

Limits are placed on allowable activities and contact with clients after retirement to ensure retention of valuable clients or customers. The use of a covenant not to compete provision is generally required to protect the business and its remaining principals.

Acceptable Arrangements Allowing Continued Service

The parties must determine an acceptable arrangements for allowing continued working for the organization.  There usually will be an employment agreement that provides for services to be performed for a contractually agreed amount of compensation for an amount of years to be determined by the parties.

Personal Liability Of Remaining Owners For Retired Owner's Full Payout

The retiring partner must be given adequate financial security and protection that any deferred payouts will be made.  Provisions such as the escrow of stock to be sold by the retiring shareholder, security interests in property, plant and equipment or real estate, letters of credit and/or personal guarantees are some legal methods that are used to ensure payment for any deferred payout under the sale agreement.

Specific Recourse Or Cures Should Retired Owner Not Be Paid in Full

In addition to escrowing or pledging stock and personal guarantees, there may be other protections built into a comprehensive sale agreement to protect the owner if not paid in full.

Ability To Block Mergers or Other Corporate Changes By Retired Owner

Often times the retired owner is given the right to block mergers or a total sale of the business or other changes to the business until full payment is made on any installment sale.  Usually such transactions can take place if the sale and any retirement payment obligation is paid in full prior or at the time of such sale or contemplated change.

Ability To Block Sale of A Line of Business

Often times the retired owner is given the right to block the sale of a line of business unless the sale and retirement obligations are paid in full prior to the contemplated transaction

Right of Existing Owners To Change Retirement Benefits For Cause

Agreements may provide the existing partners with the right to change the payout to a retiring partner due to certain behavior that jeopardizes or harms the financial well being of the organization such as improper client contact or interference, fraud or misrpresentation.

Key Man Or Other Life Insurance

The selling partner may insist on key man or other insurance on the key remaining partners to ensure payment of the outstanding obligations of under the buy out contract.

Illegal Activities As a Trigger For Forced Retirement and Buyout

Well drafted contracts provide for a buyout trigger and often at a lower amount of money than the normal buyout figure if the owner engages in various illegal or immoral activities including but not limited to sexual harassment or public embarrassment to the organization.

Lack or Poor Performance

Some agreements contain provisions that require forced retirement for lack of performance.  In addition, sometimes transitional employment agreements can be terminated early due to lack of performance or violation of the terms of such agreement.

Warning

The above discussion just touches the surface of the considerations involved in any exit strategy concerning a change in control and stewardship of an organization.  Every situation is unique so having experienced tax and corporate counsel is essential to effectuate a comprehensive agreeement that can give each party what they need and to insure the continued existence of the business.

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