Entrepreneur Information: How does a Forced Buyout Occur?

Understanding how a forced buyout works is essential if you are an entrepreneur. These agreements are referred to as "buy-out" or "buy-sell" agreements. Co-owners in a business can buy out another co-owner in a forced buyout situation for an agreed upon price stated in the agreement.

How it Occurs

There are number of circumstances that can force a buyout. For example, the executor of a deceased estate of a business partner could force a buyout in order to distribute the proceeds to the deceased's heirs. Armed with the agreement and the selling price, the executor can offer a buy out agreement to the co-owner. The executor would have the right to force out the buyer pursuant to the agreement, as long as they could pay for it.

Avoiding a Forced Buyout

The only way to avoid a forced buyout is to avoid signing any agreements with a right-to-force-a-sale provision. You can also delay it until the business is profitable enough to bear the costs of buy-out. For example, you can state that a forced buyout can only occur after a certain number of years. Some business owners ignore forced buyout situations when they research entrepreneur information, but you should pay attention if you're a co-owner in a business. Have your attorney review all agreements to advise about these types of provisions.