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


Selling your business – if you have a partner do you have a shot gun clause?

December 16th, 2009

You have decided to sell your business but what are you selling – shares or assets?  There are many ways to own a business: these are some of the more common methods –  sole proprietor, limited company, joint venture or partnership.  If you have an unincorporated business, you can own it as a sole proprietor (meaning that there is only one owner), a joint venture, partnership, undivided interest etc.  If you are unincorporated, you can sell the assets of the business or if you in a partnership, you can sell your interest in your partnership if the other partner does not decide to sell their interest.

 

If you are in partnership, what does your partnership agreement state?  Can you sell your interest to a third party or do you have to exercise a shot gun clause?  A shot gun clause is a prearranged method to force a change in ownership of the business.  If there is a shot gun clause, one partner offers to buy out the other partner however, the other partner gets to match your offer and buy out the person who exercised the shot gun clause.  The purpose of such a clause is to keep people honest.  If one person offers a low price for the interest in the business, then the other person can buy them out for the same price.  Presumably, the price that you offer you have to be willing to accept in case your partner buys you out.

 

If you are in a partnership or joint ownership of a business, there are games which are played to try to get one of the partners to initiate the shot gun.  I have seen one case where one side thought that the other side had no money.  They did not know that the other side had been arranging financing for months.  When the offer came in, it was of course too low, below the fair market value of the individual assets.  They offered $2 million less than the assets were worth.  The one party indicated to the other that they had no money, be fair etc. when you give us the offer to buy us out.  This was a game of cat and mouse but one side did not realize that.  They bit and lost.  The receiving party complied with the shot gun arrangement and tendered their offer to the other side.  That caught them by total surprise and the initial party tried to amend their offer and increase the purchase price of the business.  In a buy sell/shot gun agreement you have one shot at providing a reasonable price.  One side came in low not suspecting the other side could afford to buy them out.  They tried to play on what they perceived to be a financing weakness but it backfired.  In this case, the one side refused to close the transaction even though all the legal agreements forced them to do so.  Closing took days instead of minutes but the deal was finally closed and the initiating party lost the asset.

 

What does that mean?  The shot gun provision worked.  One party tried to buy the business below fair market value and the other side turned the table and bought them out for the below fair market value price.  You can think that you are smarter than your partner but in this case, one partner pretended to be weak but in fact was the smart one who out foxed the other side.


Filed under: Selling a business — Gary Landa @ 9:31 am


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