legal, buy-outWe have a LLC with three partners. One is leaving and we have reached a buy out agreement. The question is how do we divide his shares among the remaining partners. Proportionally to their percentage of ownership or evenly? The operating agreement didn’t specify it. What’s the common practice? Thanks.
If the LLC is providing the entirety of assets (from the business checking account, for example) to buy out the partner, then the remaining 70% equity becomes 100% of what is left. The 20% partner now owns two-sevenths (2/7) of that 70% or approximately 28.571429%, and the 50% partner now owns five-sevenths (5/7) of that 70% or approximately 71.428571%
These percentages would have to be adjusted differently if one or both of the remaining partners contributed assets to the LLC in order to make the buyout possible.
As Luke pointed out, the 70% get 100%. So the distribution goes by about 70% to 30%. Of course each partner also needs to compensate for that value, either by reduce companies value (pay with company assets) or pay the leaving party with personal assets.
But I think, you came up with something like that by yourself. Your question implies some kind of conflict, that either you feel uncomfortable (You now carry a higher overall risk) or the partner with the lower shares does.
Now there are a few ways to adjust the share:
Allow the person with the lower share to do a higher investment, so more ownership is allocated to him. (active)
If he can’t, give him the option to buy shares over time. (active)
Offer him higher shares in terms of ownership, but reduce his shares on revenue over time, so he pays over time. (passive)
Make him responsible (if he is capable) to take the responsibilities of the partner, who left. In other words: higher involvement. (active)
Reduce your involvement, so you can focus on additional thing, while he takes more/the same responsibilities. (passive)
The only thing to add here: He needs to agree to your offerings and they need to be legally approved (or at least be legal in your country)
Our contract has something, we call escalation paragraph. More or less, it says, if there is an argument about something not regulated , the problem is escalated to the CEO. Of course it’s a bit more behind that, but you get the point.
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