California's Revised Uniform Partnership Act (RUPA) contains a provision that can destroy business partnerships faster than any market downturn or economic crisis: the 120-day mandatory buyout rule.
For business owners facing divorce, understanding this rule—and its financial implications—can mean the difference between business preservation and partnership dissolution.
What is RUPA?
The Revised Uniform Partnership Act governs how partnerships operate, dissolve, and handle partner departures in California.
Unlike corporate structures where ownership transfers are often restricted, RUPA gives partners significant rights to exit partnerships and demand buyouts.
RUPA applies to:
- General partnerships
- Limited liability partnerships (LLPs)
- Limited partnerships in certain circumstances
- Many multi-member LLCs (depending on operating agreements)
The 120-Day Rule Explained
Under California Corporations Code Section 16701, when a partner dissociates from a partnership (either voluntarily or involuntarily), the partnership must purchase that partner's interest within 120 days of receiving a written demand for payment.
Key Requirements:
- Payment must be made in cash
- Valuation is based on "fair value" as of the dissociation date
- No minority or marketability discounts apply
- Interest accrues on unpaid amounts at the legal rate
The Fair Value Standard: Unlike typical business valuations that might include discounts for minority interests or lack of marketability, RUPA requires "fair value"—essentially the partner's proportionate share of the business as if it were being sold as a going concern.
How Divorce Triggers RUPA
Divorce can trigger RUPA's buyout provisions in several ways:
Direct Partnership Interest: If the divorcing spouse is a partner, their interest might need to be bought out to prevent the ex-spouse from becoming an involuntary business partner.
Community Property Claims: Even if only one spouse is a partner, community property claims to the partnership interest can force buyout situations to prevent the non-partner spouse from acquiring partnership rights.
Court Orders: Family courts can order partnership interest sales or transfers as part of asset division, potentially triggering RUPA buyout rights.
The Valuation Challenge
RUPA's "fair value" standard often produces higher valuations than typical divorce business appraisals:
No Discounts Applied: Traditional business valuations apply minority discounts (10-30%) and marketability discounts (20-40%) for small business interests. RUPA prohibits these discounts.
Going Concern Basis: Valuation assumes the business continues operating normally, not as a forced sale or liquidation.
Professional Appraisal Required: Courts typically require certified appraisals using accepted business valuation methods.
Timeline Pressures and Consequences
The 120-day deadline is absolute. Failure to pay within this timeframe can result in:
Interest Accrual: Legal interest rate (currently 10% in California) begins accumulating on unpaid amounts
Partnership Dissolution: Continued non-payment can force complete partnership dissolution
Legal Action: The departing partner can sue for payment plus attorney fees and costs ** Business Disruption:** Uncertainty about ownership affects operations, employee retention, and customer relationships
Common Scenarios
The Divorcing Partner: A 25% partner in a successful consulting firm gets divorced. To prevent their ex-spouse from becoming an involuntary partner, the remaining partners want to buy out the divorcing partner's interest. RUPA gives them 120 days to raise $400,000 (25% of $1.6 million fair value).
The Community Property Interest: A spouse owns 40% of a manufacturing company worth $3 million. During divorce, the community property portion (growth during marriage) is determined to be worth $600,000. The non-partner spouse doesn't want to remain connected to the business, triggering buyout requirements.
The Forced Sale: Family court orders the sale of a partnership interest to provide liquid assets for property division. The sale triggers other partners' buyout rights under the partnership agreement and RUPA.
Financing Challenges
Traditional lenders struggle with RUPA-triggered buyouts:
Timeline Constraints: 120 days from demand to payment doesn't allow for lengthy loan approval processes
Valuation Disputes: Ongoing appraisal disputes create uncertainty that banks cannot underwrite
Partnership Documentation: Complex partnership agreements and operating documents require specialized legal review
Personal Guarantees: Partners may lack sufficient personal assets to guarantee business buyout loans
Strategic Planning Opportunities
Buy-Sell Agreements: Well-drafted partnership agreements can establish valuation methods, payment terms, and funding mechanisms that modify RUPA's default rules.
Life Insurance Funding: Key person and buy-sell insurance policies can provide immediate liquidity for partnership buyouts.
Installment Payment Structures: Partnership agreements can provide for installment payments over periods longer than 120 days, though partners must agree to these terms.
Valuation Method Specifications: Agreements can establish specific valuation approaches that differ from RUPA's fair value standard, provided all partners consent.
Integration with Divorce Strategy
Smart divorce planning considers RUPA implications early:
Timing Coordination: Understanding when RUPA buyout demands might be triggered allows for better financial planning and settlement structuring.
Valuation Consistency: RUPA's fair value standard might differ from community property valuations, affecting overall settlement negotiations.
Liquidity Planning: Knowing that partnership buyouts require cash payments within 120 days helps prioritize financing arrangements.
Business Continuity: Planning for partnership transitions helps preserve business operations and relationships during divorce proceedings.
The Role of Specialized Financing
RUPA buyout situations often require specialized financing solutions:
Speed Requirements: Traditional banks cannot meet 120-day deadlines consistently
Complex Underwriting: Partnership interests require specialized valuation and legal analysis
Bridge Financing Structure: Short-term funding while permanent solutions are arranged
Business Continuation Focus: Financing must preserve partnership operations and relationships
Risk Management
For Departing Partners: Ensure buyout demands are properly documented and delivered according to RUPA requirements. Consider whether installment payments might be preferable to immediate cash demands.
For Remaining Partners: Plan ahead for potential buyout scenarios through insurance, credit facilities, or partnership agreement modifications.
For Everyone: Understand that RUPA's 120-day rule is mandatory, not negotiable, unless partnership agreements specify alternative procedures.
California's RUPA creates both opportunities and obligations for business partners.
The 120-day buyout rule can preserve partnerships by facilitating clean departures, but it can also destroy businesses that lack adequate liquidity planning.
For divorce situations, RUPA adds another layer of complexity and urgency to already complicated proceedings. Understanding these requirements early and planning accordingly can prevent partnership dissolution and preserve valuable business relationships.
Understanding partnership law helps plan better exit strategies
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