I AM SELLING TO MY PARTNER
Selling out to a partner is usually a highly volatile business scenario. While some partner buyouts are orderly, long-planned, relatively emotionless exercises, others are the opposite. In many cases, either you or your partner is surprised, your partner may not particularly want to buy you out, or you may not particularly want to be bought out, and there may be hard feelings involved. This leads to wealth-threatening risks, such as disrupting your compensation, being frozen out of the company, or even litigation.
If you have a buy-sell agreement, plan to follow it, if possible. If it is fairly neutral, it will help bring some order to chaos. If it happens to benefit one of you more than the other, then you’re going to either want to or be forced to follow it anyway.
Many buy-sell agreements call for one or more independent appraisals of the business to be performed, which will then determine the buyout price. The task remains to select that appraiser and the conditions of the appraisal assignment. If your process to select the appraiser and appraisal scope is poor, it can increase the risk of the already volatile situation, rather than resolve it. To manage the risk of the buyout appraisal, consider the following:
Read the buy-sell agreement, and share it with your appraiser candidates. Many buy-sell agreements (but far from all) specify how an appraiser is to be selected, including the minimum qualifications that appraiser must have. Some agreements specify the effective date of value, the standard (definition) of value to be used, and in the case of multiple appraisers being retained, how the discrepancy between appraisal results is to be addressed. Unless you anticipate that you and your partner will agree to waive the requirements, you don’t want to waste time and energy (and create unnecessary tension) considering candidates who don’t qualify.
Don’t try to stack the deck. If you happen to have a college classmate who is a qualified business appraiser, and you hope that hiring her will lead to a favorable conclusion on your behalf, assume your partner will discover the relationship. Once your partner discovers you’re trying to bias the valuation result on your behalf, that will end any spirit of cooperation in the process, which will drag it out, and make it more expensive. A tense situation will be ramped up sharply.
Avoid an entitlement mentality. You may feel like you’re entitled to a high buyout price because you worked harder than your partner, or otherwise contributed more value. Maybe you feel like your contributions to the company over time have been dismissed, or you’re being forced out unfairly. While you may feel like you have the moral high ground, the practice of valuation doesn’t recognize moral high ground or even sweat equity. If you hold on to an entitlement mentality, you can safely assume your partner will do the same, which will increase tension in the business and make a transaction much harder to complete.
Selling out to your partner, if not handled correctly and with care, can be a pyrrhic victory, even if the buyout is successful. Handled incorrectly, the sale can result in more money spent on lawyers and accountant, more distraction and a lower sale price all the same. If you’re concerned about the buyout process possibly going astray and harming the business, contact us at High Score Strategies for a consultation.
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