“Adversity does not build character, it reveals it.”
James Lane Allen, Novelist, 1849-1925
The sudden onset of the Coronavirus has required private company business partners to confront unprecedented challenges. In some cases, the partners’ actions in dealing with the Pandemic have led to conflicts revealing incompatible views between them in how to operate the business in a time of crisis. As a result, the partners may want to engage in a Business Divorce after the virus subsides, but separating one or more business partners from the company is not likely to be simple or smooth if they have not already put a buy-sell agreement in place. Fortunately, the absence of a current buy-sell agreement is not an insurmountable hurdle if the partners will take the time to negotiate and adopt a mutually beneficial partner exit plan. Reaching agreement on a buy-sell agreement is a critical step for business partners to avoid a prolonged and expensive conflict that will be both disruptive to the company and also potentially destructive to their personal relationship.
This post discusses the key factors that both majority owners and minority investors will want to consider in negotiating a mutually acceptable buy-sell agreement that allows for partners to depart the business on amicable terms in the future.
The Trigger Point
The first question business partners will need to address is when the buy-sell agreement can be triggered. To be fair to both sides, the parties will both want the right to trigger a buyout or redemption. From the majority owner’s perspective, he or she may not want to be required to remain in business with the minority investor. The majority owner will therefore want to secure a “redemption right” to repurchase the investor’s ownership interest at some point. By the same token, the minority investor will not want to be stuck holding an illiquid, unmarketable interest in the company with no exit right. The minority investor will therefore want to ensure to obtain a “put right” that enables the investor to secure a buyout from the majority owner and the right to monetize the investor’s ownership interest in the company.
Continue Reading Time for A Buy/Sell Agreement? Private Company Owners May Need to Put a Partner Exit Plan in Place