The Four Keys of Responding to a Buyout Offer

Last month we provided an approach for buying out your business partner. This month, we cover the other side the discussion, which is how to respond when presented with a buyout offer.

For many, being offered to be bought out will be an even more impactful decision than for the would-be buyer. The buyer has some room for error because they still have the business.

Though a tough decision, with a proper mindset and a robust process, you can achieve a good outcome from a buyout offer from your partner. However, to accomplish that good outcome, you must keep your head, know your rights (and limitations thereof), have command of key information, and set specific goals for the transaction that is to come.

Keep your head.

There’s no way around it: when you are being asked to sell your shares to your partner, you’re being asked to resign. Your partner thinks you are dragging them down. He or she thinks that they will be better off without you. You probably believe your partner’s impressions of you are flat-out wrong. You might think your partner is being stone cold greedy and is power mad. You’re probably frustrated that your partner is not being held to account for his or her own flaws. You could well feel betrayed. While all of those feelings may be justified, allowing them to consume you will interfere with achieving your financial objectives. You must always be the adult in the room to achieve the best financial result from a buyout offer.

Know your rights.

The first action you should take when receiving a buyout offer from your partner is to review your partnership/shareholder/operating agreement, and right after that, retain legal counsel to do the same. Know if the agreement has a partner buyout mechanism, what it is and how it works. This part of the agreement, known as a buy-sell agreement, may specify how a buyout price is determined and how the buyout would take place. For example, is it a lump sum or is it structured payments over a specified period.

The buy-sell agreement may specify triggers or conditions under which the buyout automatically takes place, unless both the buyer and seller agree to set it aside. Once you know what your rights are under the agreement you (presumably) signed, consult with legal counsel to understand where state law covers the ambiguities of your agreement.

Know your leverage.

Most buy-sell agreements contain triggers in the event of the death, disability, or divorce of a shareholder. In our experience, it is rare for a trigger to be linked with one partner simply wanting to buy out the other, or that there is some kind of imbalance in the contributions of the partners to the company. This means that it may be hard to force you to accept a buyout. Accordingly, you have some leverage in the form of aggressively defending your rights as a shareholder, including, but not limited to, receiving financial information about the company, properly conducted and documented board meetings, and scrutiny over executive compensation. How aggressive you can be will depend on the state in which the company is incorporated or headquartered, and you should also be mindful of any legal exposure you may have.

As the saying goes, “Those in glass houses ought not to throw stones.” The good news is that your partner is likely strongly motivated to move forward without you, and that gives you *some* leverage to make a good deal for yourself. Life with a disgruntled shareholder can be unpleasant indeed.

Know the value.

Finally, it is critical that you know and understand the value of your interest in the company, especially if your agreement calls for you to be bought out at a fixed price or pre-set formula. Many, if not most buy-sell agreements provide for at least one third party appraisal of the company to be produced. Regardless of how the appraisal provision in your agreement works, you should, at a minimum, have an independent business appraiser review an appraisal provided by the company. You should also strongly consider commissioning your own appraisal as a check on that which is provided to you.

Being presented with a buyout request can be upsetting and even somewhat scary. Partnering with the right advisors can make it much less so and can even help you identify leverage on your part to turn around what might appear to be a setback into a financial opportunity.

By reducing the buyout to a purely business transaction, having a full understanding of your rights as a shareholder, and command of the value of your interest in the company, you can have the clarity required to achieve a positive outcome.

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