Exit Plan

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“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

By Jeff Balcombe [1] — We are pleased to present this guest post from Jeff Balcombe, a highly regarded business valuation expert based in Dallas, who is a founding principal with his firm BVA Group.

In a perfect world, business partners who reach the point of parting ways would have a clear, unambiguous plan in place governing their separation.  Unfortunately, when they engage in business in the real world, many company owners who need a Business Divorce find that they never adopted any type of separation agreement or that the agreement they have is missing key elements necessary to facilitate a prompt, inexpensive separation.  This post therefore outlines a Business Divorce process designed to achieve a prompt, efficient exit plan for business partners.

The Exit Plan Should be Approved When the Investment is Made

For an exit plan to work effectively, it must be adopted in advance, because a successful Business Divorce involves far more than determining a buyout price based on an appraisal that supports the buyer’s or seller’s notion of value.  In fact, a “ready-fire-aim” approach that calls for getting an appraisal, and then starting buyout negotiations is almost certain to result in a drawn-out, expensive process that may end with the parties in dispute.  To minimize costs and reach an agreed outcome, both parties must adopt a process with a definite end-point—a successful separation.
Continue Reading Avoiding Business Divorce Disaster: A Business Valuation Expert’s View

Picking the devil you know in selecting a business partner may seem like a good strategy.  But the list of celebrities who have suffered financially in their dealings with business partners is striking with losses totaling millions of dollars in some cases.  Uma Thurman lost $1 million. Sting lost $9.8 million. Billy Joel lost $90 million.  And celebrities are not the only ones who have suffered negative results because they, like so many people, picked poor business partners.  Fortunately, there are steps that anyone entering into a long-term relationship with a business partner can take to avoid the financial consequences of a disastrous partnership.
Continue Reading The Devil You Know: Pick Business Partners Wisely and Plan For Problems Ahead