What to Pay in a Partner Buyout
By Nina Kaufman, Esq.When you’re thinking about business divorce, there are a couple of hot button items that come to mind. First, you want to know which events trigger a buyout. The three D’s usually factor into the most well-drafted partnership agreements: death (pretty obvious), disability (perhaps less obvious–how would you define “disability”?), and dissolution (you and your partner agree to close up shop).
Next, you need to know where the money will come from. In the case of death, it can come from life insurance proceeds.
But the kicker is often how much will you pay?
Chris Mercer, author of the newly released Buy-Sell Agreements for Closely Held and Family Business Owners, raised this issue in an earlier treatment of the subject of buy/sell agreements.
Well, to take the poet, Elizabeth Barrett Browning, out of context, “Let me count the ways”:
- You could agree on a fixed price. Problem is, the price you establish at the inception may not be fair 10 years down the road.
- You could develop a formula, such as a multiple of earnings. But you need to be sure the formula makes sense for your industry.
- You could go to an appraiser (or appraisers) and let her figure it out. However, who will choose the appraiser? Will they be biased toward one side or another? If you get multiple appraisers, those professional fees can mount quickly.
- You could take a shotgun approach. No, I’m not advocating Winchester or Smith & Wesson. 🙂 Under this approach, you name your price, and the other owner can choose to buy you out, or be bought out at that price. Set the price too low, and you’ll get very little. Set the price too high, and your former partner will be basking in Bora Bora before you can say “blindsided.”
Do you see how much is involved in putting together a buy/sell ownership agreement properly? That, my friends, is why these kinds of agreements aren’t “one-pagers.”
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