Management Buyouts: Buying Out a Partner

28 Feb Management Buyouts: Buying Out a Partner

Posted at 21:33h in Financial, Legal, Transitioning Your Business by
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If you’re in business with a partner, you’re familiar with the juggle. Sometimes the partnership works well. Sometimes it doesn’t. When one partner reaches the decision that it’s time to leave, it may be a good idea to buy out your partner.

Consider this checklist of issues:

  1. Background and Personal Issues
  • What kind of business is it? Is it incorporated? When was it established? How big is it (annual sales, number of locations, number of employees)?
  • Who are the partners? What do they each bring to the table now? What have they brought to the table in the past? What is triggering the split up?
  • Will this split be amicable?
  • What is the legal/share structure of the business?
  • Is there a shareholders’ agreement? What does it say?
  • Who is the company accountant? Who are the professional advisors?
  • Who are the potential mediators or interested third parties?
  • What is the ability and willingness of the partners to communicate face to face?
  1. Valuation Issues
  • What is the current financial situation of the business?
  • What is the present value of the business, and the extent to which it is dependent on personal goodwill?
  • What are the particulars of any shareholder loans or unpaid dividends, salary or bonuses?
  • What are the potential “fair market values” and “fair values” of each shareholder “investment”?
  • How much cash or how many cash equivalent resources are in the business?
  • What does the shareholders’ agreement say about valuation or the process for determining value?
  • Are there any other shareholder discussions or agreements on the value or the process for determining value?
  1. Partner as Employee Issues
  • Is there just cause for termination?
  • Are there issues of wrongful dismissal (i.e., notice, compensation, benefits)?
  • What are the obligations for confidentiality?
  • Are there tie-ins to other issues?
  1. Strategic Issues
  • The potential for a non-buyout strategy, including division of assets and other remedies.
  • The relative financial strengths and needs of the partners, and their ability to raise financing.
  • The likelihood of arbitration or litigation.
  • The type of deals that have already been discussed.
  • The likely timeframe in which a deal will be done, including a likely cutoff date and a likely closing date.
  • The division of cost and expenses, and any issues related to this.
  1. Preservation of Value Issues
  • Who will operate the company in the meantime?
  • How will physical space be shared in the meantime?
  • How will salaries, bonuses, profits, etc., be paid in the meantime?
  • How will the split impact interested parties? When will the news be shared, who will learn it, and how those loyalties will be managed?
    • Employees
    • Key suppliers
    • Customers
    • Accounts receivable
    • Work in progress
    • Third-party investors and bankers
    • Other third-party approvals, e.g., government licenses, landlords
    • Third party guarantees
  • How will personal use or special assets be split up?
  • How will non-competition, non-solicitation obligations be managed?
  1. Purchase Price Issues
  • Shareholder loans or unpaid dividends
  • Earned but undistributed profits
  • Employment payments (e.g., severance packages)
  • Consulting payments
  • Restrictive covenant payments
  • Royalties or earnout issues
  • Payment for shares
  • Other types of payments
  • Timing of payments and contingencies
  • Purchase price adjustment issue
  1. Financing Issues
  • Leveraged buyout, including “safe income” availability and increasing company borrowings
  • Buyer funding from own or other resources
  • Third party financing
  • Vendor take back financing
  1. Income Tax Issues
  • Who will provide tax advice to the parties?
  • Who will use the capital gains exemption?
  • Is there availability for “safe income”?
  • What are the deemed dividend issues, and what is the impact to the seller and the buyout?
  • Will there be a severance package?
  • Are there any consulting fees, employment income, etc.?
  • Are there any non-competition, non-solicitation payments?
  • Are there any royalty or earnout payments?
  • When does the change in control happen? What is the deemed year end?
  1. Miscellaneous Legal Issues
  • What guarantees need to be released?
  • What representations and warranties are required?
  • What special covenants are required?
  • What releases are required, and from who?
  • What indemnities are required, and from who?
  • What resignations are required, and from who?
  • Who needs what representation, including independent legal advice?
  • Does the company require a name change?
  • Do the company corporate records need to be updated?
  1. Structure Summary

The buyout should include the following pieces of information:

  • Name of buyer.
  • Name of seller.
  • The specific assets the seller is taking from the company, and the value of those assets.
  • The specific liabilities the seller is assuming, and the value of those liabilities.
  • The amount of money the seller is being paid, as well as who pays the money, when the money is paid and what the buyer is getting.
  • Where the financing is coming from and on what terms.
  • The terms of any VTB financing.
  • The terms of any royalty or earnout.
  • The terms of any restrictive covenants.
  • A release of any personal obligations.
  • Indemnities and releases.
  • Representations and warranties.
  • Any details regarding the management of other third party issues: employees, suppliers, customers, etc.
  • The effective date for the sale.
  • The closing date for the sale.
  • Any closing financial statements.
  • Details about the interim management of the company.
  • Any price adjustment issues, including when and why and how they were managed.
  • Any additional security issues.
  • Any post-closing obligations not already covered above.
  • The implementation strategy, including who is doing what, and by what date(s)?
  • The costs and budgets: how much, when, and who pays.

To learn more about transitioning your business, contact us.

 

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.

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