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Business escape plan: The buy-sell agreement

| Apr 29, 2021 | Partnership Disputes |

The pandemic has compelled many California business partners to meet unprecedented challenges. In some cases, the challenges have revealed starkly dissimilar views on how to operate a business in difficult times.

As a result of partnership disputes, some will want to dissolve their partnership after the pandemic’s end. No matter what the reason for separating a business partner from the company, the process is unlikely to be straightforward if they don’t already have a buy-sell agreement in place.

The good news for those businesses without a current buy-sell agreement is that partners can negotiate and adopt a mutually beneficial exit plan that will help them avoid a protracted, pricey conflict that harms both the business and their personal relationship.

Major points to address in the negotiation of buy-sell agreements include the following:

Pulling the trigger

The first item for partners to decide is under which circumstances the buy-sell agreement can be triggered.

A majority owner typically wants a “redemption right” to buy out a minority owner’s interest, while a minority owner wants a “put right” that enables him/her to secure a buyout. The minority owner also wants the protection of a “look back” provision that ensures additional compensation if the majority owner triggers the buy-sell agreement and then sells the business at a higher value.

It’s also a good idea to include for all partners a notice requirement before the buy-sell agreement is exercised so that surprises can be avoided and partners have the time needed to prepare for the impending transaction.

Determining the business value

It’s common for partners to agree that whoever triggers the buy-sell will hire a business valuation specialist to determine the company’s value – and that the other partner has the right to retain his/her own valuation specialist. And then there’s an agreement that if the two valuations are 10 percent or more apart, the valuations experts will hire a third specialist and then the three valuations will be averaged to determine the final value of the company.

Structured buyout

It’s common for the purchase price to be paid to the minority owner in a structured buyout over several years. The structured buyout agreement typically includes the amount of cash to be paid upfront, the time the buyout will take, whether interest will be paid and at what rate, and the collateral for default protection for the minority partner.

Review, too

If partners already have a buy-sell agreement in place, it is a good idea to conduct an annual review that can include:

  • Needed adjustments to the value of the business or each partner’s interest
  • Examination of buy-out triggers and conditions to ensure they’re still appropriate
  • Updating the buy-sell agreement to reflect any financial or funding changes in the company

Negotiation of a mutually agreed-upon buy-sell agreement can save lots of headaches, money and personal relationships down the road, while review of an existing agreement can keep everyone on the same page as your company moves forward. A skilled legal professional can help with both of those processes.