This article are provided for information purposes only, and are not intended as legal advice.


Buy sell agreements, when do you trigger them?

February 26th, 2009

The economy is slowing down and you have to work double the hours to earn the same amount of money.  Your partner is unwilling to do the extra work to keep the business profitable.  You are in a specialized business and it is hard to find qualified people for this position.  Do you trigger the buy sell agreement to get rid of your partner?  Remember, you may think that you are buying him/her out however they can match the deal and take you out.

 

I knew several partners who were not getting along.  The one partner, lets call him partner A really wanted to get rid of the other partner, partner B and tried everything to get partner B to trigger the buy sell agreement.  Partner B realized what was going on and arranged financing so when the buy sell agreement was triggered by partner A he could either accept the offer or if it was too low, he could buy out the other partner.  Sometimes it is very obvious that the partners do not get along and the buy sell agreement may be triggered.  Sometimes, it comes out of the blue and one partner did not see it coming.

 

Please keep in mind that triggering a buy sell agreement if not amiable, which few are, tends to ruin the relationship between the partners, but if the buy sell agreement was going to be triggered anyways, there was a good chance that this relationship had already deteriorated.

 

Going back to my original comment above, you are short on staff and your partner is not carrying out his or her weight.  Do you trigger the buy sell agreement?  There is no right and wrong answer, only you know your situation. Many partnerships split because one partner feels that he or she is doing all the work and is carrying the other partner.  You need to ask, is this temporary, is there something outside of the work which is impacting the performance, is this performance deterioration permanent or temporary?  Are you willing to carry the weaker partner to see if things change?  If you buy out your partner in a poor economy, can you afford to carry the debt that may go along with the buyout?  Will the burden of the additional debt be overwhelming?  If so, are you stuck with your partner, for better or worse until the economy improves and you can afford to take out your partner? 

 

If the economy takes a toll on the earnings of your business, your business will be worth less today then it was yesterday.  Do you let the company flounder until the weaker partner says it is time to get out and the split is amiable.  The amount that you will offer in a buy sell agreement will get lower and lower and the earnings of the business deteriorate.  Once he or she leaves, then you ramp up sales again to restore it back to the old company. Will playing games with customers to make your buyout cheaper work to your advantage or could it harm and company and you permanently lose the customer?  The partner who controls the sales and the customer is more likely to win out in a buy sell agreement because the administrative partner may lose the customers if the sales partner leaves.  If you have no relationship with your customers, do you really want to exercise the buy sell agreement unless you have a replacement for your partner. 

 

There are many things to think about when divorcing your business partner and triggering a buy sell agreement.  Only after you have triggered the agreement and you control the company (and not get bought out) will you find out if it was the right move for you personally and for the business.


Filed under: Buy sell agreements — Gary Landa @ 10:13 am


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