4 things to include in a separation agreement

On Behalf of | Mar 27, 2020 | Firm News |

When a business owner wants to leave the company, a separation agreement can keep issues such as asset transfers and liability for debts, taxes and judgments from cropping up afterward. Ideally, the owners already addressed many of the matters when they drafted their partnership agreement. Regardless, it is a good idea to also create this legal contract to offer further protection for both the departing owner and those who stay and keep the business running.

Here are four matters that business owners should address in a separation agreement.

  1. Transfer of assets and liabilities

First, owners must identify all of the company’s assets and liabilities. This will help determine the value of the leaving owner’s interests in the business. The separation agreement should detail the method of compensation and the amount that the leaving owner will receive. It should also include what liabilities, if any, the former partner will remain responsible for.

  1. Treatment of shared contracts

Owners should gather all the documents that create liability for the leaving partner, such as:

  • Contracts
  • Loans
  • Leases
  • Lines of credit
  • IRS documents
  • Accounts payable

Each type of document may have specific processes for removing a cosigner’s name.

  1. Indemnity agreement

It may not be possible to remove someone from a contract, or there may be other possible liabilities that may cause damages for the former partner. So, the separation agreement should explain the protection he or she has from lawsuits if the business becomes liable in a breach of contract dispute or other litigation. This could involve an indemnification escrow account, security interest in the business’s assets or some other arrangement.

  1. Right to audit clause

A separation agreement may provide for ongoing compensation that depends on the company’s revenue. In this case, the former partner may want to have the ability to review the records and ensure that the business is fulfilling its side of the agreement. This may be especially important if the separation is occurring due to conflict and there is suspicion of fraud. However, even if everyone is separating on good terms, it is a good idea to include this clause.