Business Divorce: Buying Out a Partner in California

I draft buyout and separation agreements for California co-owners who have decided to part ways. I don’t litigate. When one side has sued or is about to, both sides need litigation counsel, and I refer those cases. This page is for owners who want to understand the terrain first: what the documents say, what a negotiated buyout should contain, and what the court routes look like if negotiation fails.

What is a business divorce?

It’s the separation of co-owners of a closely held company, whether that’s two partners in a restaurant or four members of a property LLC. The owners have to decide who keeps the business, what the departing owner gets paid, and how the business’s debts and guarantees are handled on the way out.

It’s a different thing from a spousal divorce involving a business, though the two overlap. When an owner’s marriage ends, the owner’s spouse usually has a community property claim to part of the interest, and a family law attorney handles that case. My buy-sell agreement guide explains how a spousal consent keeps a former spouse from becoming a co-owner.

What should I check first?

Your documents. A buy-sell agreement, an operating agreement, a partnership agreement, or a shareholders’ agreement may already say who can buy, at what price, and on what schedule. If one of them covers the situation, the negotiation is about applying it.

Even the statutory corporate buyout yields to planning. The shareholder buyout in a dissolution case applies subject to any contrary provision in the articles, which may refer to a separate written agreement between shareholders about purchasing shares (Corp. Code § 2000(a)). For an LLC, the operating agreement governs relations among the members, and the statute fills only the gaps (Corp. Code § 17701.10).

If you have no agreement, or it’s silent, the defaults apply. For an LLC, those defaults are covered in my guide to removing an LLC member, and for a partnership, in my guide to partnership agreements.

What are my options for ending a business partnership in California?

Option	How it works	Who handles it
Negotiated buyout	One owner, or the company, buys the other out under a signed agreement.	Transactional counsel for each side, plus a CPA and often an appraiser.
Agreed sale to a third party	The owners sell the whole company and split the proceeds.	Transactional counsel, a CPA, often a broker.
Agreed dissolution	The owners vote to dissolve, wind up, and divide what’s left.	Transactional counsel and a CPA.
Mediation	A neutral helps the owners reach one of the above.	A mediator, with each side’s counsel.
Court dissolution or expulsion	One owner sues to dissolve the company or expel the other.	Litigation counsel.

The first three avoid court entirely. The statutory buyouts described below apply only to the last one, and it’s usually the most expensive and slowest way to reach the same place a negotiated deal would have.

How do I buy out a business partner in California?

With a written agreement that sets the price, the payment terms, and every loose end, signed by everyone with an interest. The process I follow runs in this order.

1. Gather the numbers. Tax returns, financial statements, loan balances, and the company’s records. An LLC must keep copies of its federal, state, and local tax returns for the six most recent fiscal years at its office (Corp. Code § 17701.13(d)(4)).
2. Agree on how to value it. An agreed number, a formula, or an appraiser both sides accept. My guide to valuing a small business covers the methods.
3. Sign a term sheet. Price, down payment, note terms, and the handful of deal points that would kill the deal if left open.
4. Draft the buyout agreement and the closing documents listed below.
5. Close. Payment, signed assignment, resignations, and the updated company records.

What goes in a partner buyout agreement?

• Price and structure. Whether the company redeems the interest or the remaining owner buys it. That choice changes the tax result for both sides, so ask your CPA before you choose.
• Payment terms. Cash at closing, or a promissory note with interest, a payment schedule, and a security interest in the interest being sold.
• Debts and guarantees. The departing owner’s personal guarantees stay in place until the lender or landlord releases them. The agreement should require the buyer to get releases or indemnify the seller.
• Releases. Mutual releases of claims, with any exceptions stated plainly.
• Non-competition. A member or partner selling all of their ownership interest may agree with the buyer not to carry on a similar business within a specified area where the business was carried on (Bus. & Prof. Code § 16601). It has to fit the statute to be enforceable. See my non-compete guide.
• Transition. Customer introductions, a short consulting period if one is wanted, and the handoff of passwords, accounts, and licenses.
• Tax allocations. How the year’s income is split and who files what.
• Representations. The seller owns the interest free of liens, and the buyer has authority to buy.
• Closing deliverables. Assignment of the interest, resignation from any manager or officer role, updated member records, and bank signature changes.

A worked example

Two members own a Thousand Oaks restaurant LLC 50/50. The business is worth about $900,000 as a going concern, and the LLC owes $200,000 on a bank loan both members personally guaranteed. The equity is about $700,000, so each half is worth about $350,000 before any discount.

The member staying on offers $350,000: $100,000 at closing and $250,000 over five years at a fixed rate, secured by a pledge of the purchased interest. The departing member asks the bank to release his guarantee. The bank refuses unless the loan is paid down, so the agreement has the staying member indemnify him and refinance within two years. Each point is negotiable, and none of it requires a court.

What if my partner won’t agree to a buyout?

Then the options are statutory, and they run through court. Everything in this section is litigation, which I don’t handle. It’s here so you understand what your litigation counsel will be talking about.

Corporations: involuntary dissolution and the section 2000 buyout

A verified complaint for involuntary dissolution of a corporation may be filed by, among others, half or more of the directors, or shareholders holding at least 33 1/3 percent of the shares or equity, or any shareholder of a close corporation (Corp. Code § 1800(a)). The grounds include a deadlocked, evenly divided board, shareholder factions so deadlocked the business can’t be conducted to the shareholders’ advantage, persistent fraud, mismanagement, or unfairness toward shareholders, and, for a corporation with 35 or fewer shareholders, liquidation being reasonably necessary to protect the complaining shareholders (Corp. Code § 1800(b)).

The other side can end the dissolution by buying. The corporation, or if it doesn’t elect to, the holders of 50 percent or more of the voting power, may avoid the dissolution by purchasing for cash the plaintiffs’ shares at their fair value (Corp. Code § 2000(a)). Fair value is determined on the basis of liquidation value as of the valuation date, taking into account the possibility of selling the entire business as a going concern in a liquidation (Corp. Code § 2000(a)).

If the sides can’t agree on the number, the court appoints three disinterested appraisers to appraise the fair value of the shares (Corp. Code § 2000(c)). In a suit under section 1800, the valuation date is the date the action was filed, unless the court sets another date for good cause (Corp. Code § 2000(f)).

LLCs: judicial dissolution and the section 17707.03 buyout

A manager or member may file an action, and a court may decree dissolution of an LLC when any of the statutory events occurs (Corp. Code § 17707.03(a)). The events are that it isn’t reasonably practicable to carry on the business under the articles or operating agreement, dissolution is reasonably necessary to protect the complaining members, the business has been abandoned, management is deadlocked or subject to internal dissension, or those in control have been guilty of or knowingly countenanced persistent and pervasive fraud, mismanagement, or abuse of authority (Corp. Code § 17707.03(b)).

In any suit for judicial dissolution, the other members may avoid dissolution by purchasing for cash the moving parties’ membership interests at their fair market value (Corp. Code § 17707.03(c)(1)). If they can’t agree on the value, the court appoints three disinterested appraisers to appraise it (Corp. Code § 17707.03(c)(3)). The valuation date is the date the action was filed, unless the court designates another date for good cause (Corp. Code § 17707.03(c)(5)).

Two details matter to anyone thinking about filing. A dismissal of the dissolution suit doesn’t affect the other members’ right to avoid dissolution by buying (Corp. Code § 17707.03(c)(6)). So filing can start a buyout the filing member can’t take back. And damages for breach of an agreement may be deducted from the price, though a member who sues on the abandonment, deadlock, or fraud grounds isn’t liable for breach of contract damages for bringing the action (Corp. Code § 17707.03(c)(1)).

Fair value and fair market value aren’t the same words

The corporate statute uses “fair value,” defined around liquidation value with a going-concern sale in mind. The LLC statute uses “fair market value.” Whether a minority or marketability discount applies, and how the appraisers treat goodwill, can move the number a long way. That’s a question for litigation counsel and the appraisers, and it’s one more reason a signed price formula in a buy-sell agreement is worth having.

Partnerships: dissociation and the section 16701 buyout

A general partnership works differently, because a partner can force the buyout without suing. A partner is dissociated when the partnership has notice of the partner’s express will to withdraw (Corp. Code § 16601). If a partner is dissociated, the partnership shall cause the dissociated partner’s interest to be purchased for a buyout price set by the statute (Corp. Code § 16701(a)).

The buyout price is based on the greater of liquidation value or the value from a sale of the entire business as a going concern without the dissociated partner (Corp. Code § 16701(b)). If no agreement is reached within 120 days after a written demand for payment, the partnership must pay in cash its estimate of the price and accrued interest (Corp. Code § 16701(e)). In a two-partner partnership at will, a withdrawal can dissolve the partnership instead, which my partnership agreement guide explains.

How should I act while a buyout is pending?

Keep acting like an owner with duties, because you still are one. In a member-managed LLC, each member owes the others the duties of loyalty and care, and must act consistently with good faith and fair dealing (Corp. Code § 17704.09). Partners owe the partnership and each other the same duties (Corp. Code § 16404).

• Don’t move money out of company accounts or change the locks and passwords without authority.
• Don’t start a competing business or take customers before the deal closes.
• Keep paying the company’s bills and filing its returns.
• Put offers in writing and keep copies of the company’s records you’re entitled to.
• Talk to your own lawyer before you sign anything the other side drafted.

What tax questions should I bring to my CPA?

• Is a redemption by the company or a purchase by the other owner better for each side?
• If I’m selling on a note, can I report the gain as I’m paid?
• For an LLC taxed as a partnership, how are payments to the departing member characterized, and should the LLC make a basis adjustment election?
• For an S corporation, what happens to the election if the ownership changes?
• How is this year’s income split between us?

What changes in my estate plan after a buyout?

If you sold, the interest in your trust becomes a promissory note or cash, and your trust and beneficiaries should reflect that. If you bought, you now own more of a company that needs a succession plan, a new operating agreement, and possibly key person insurance. The page on what happens to an LLC when the owner dies covers the single-owner problem a buyout can create.

Where I fit

I draft buyout agreements, separation agreements, promissory notes and security agreements, releases, and the operating agreement or shareholder documents that go with them, and I review agreements the other side proposes. I work alongside your CPA and any appraiser. If a lawsuit has been filed or one side has threatened to sue for dissolution, expulsion, or breach of fiduciary duty, you need litigation counsel, and I can refer you.

Frequently asked questions

How is a partner buyout price determined in California?

First by whatever your buy-sell, operating, or partnership agreement says. Without an agreement, the owners negotiate, usually with an appraisal. In a court case, the statutes set the standard: fair value for a corporation, fair market value for an LLC, and a statutory formula for a general partnership.

Can I force my business partner to sell to me?

Not directly, unless an agreement gives you that right. When a co-owner sues to dissolve a corporation or an LLC, the statutes let the owners who want to keep the business buy out the ones who sued, and your litigation counsel can explain whether that fits your case.

Can my partner force me to buy them out?

In a general partnership, often yes, because a withdrawing partner is generally entitled to be bought out at the statutory price. In an LLC, a withdrawing member has no statutory right to be paid for the interest unless the operating agreement provides one. In a corporation, there’s no general right to be bought out outside a dissolution case.

What happens in a 50/50 deadlock?

If the agreement has a deadlock clause, such as mediation followed by a buy-sell offer, use it. If not, deadlock is a ground for judicial dissolution of both corporations and LLCs, which is a litigated route. Most 50/50 owners do better with a negotiated buyout.

How long does a business divorce take?

A negotiated buyout can close in weeks once the price is agreed. A court case takes far longer and costs far more. The difference is usually the main argument for settling.

Do I need a lawyer to buy out my partner?

You’re not required to have one, but each side should have its own. A buyout touches taxes, debt, guarantees, and restrictions on competition, and the signed agreement is the only protection either side gets.