Partial buy-out question
February 03, 2022
by a searcher from University of Pennsylvania - The Wharton School in Tulsa, OK, USA
Community, quick request: Have you/ has anyone you know ever done a partial buyout of a company? IE are you familiar with a searcher purchasing a portion of a company from the founder to buy their way into the organization? I've found a great company, and the owner is in his 60s, doesn't have a succession plan, and would like to sell a stake in the business to someone he could partner with.
Appreciate any input you may have!
from Tufts University in Jersey City, NJ, USA
1) Who is going to be the majority owner? What rights with the controlling partner have? What protections will the non-controlling partner have?
2) How do you plan on handling disagreements when you can't arrive at consensus?
3) Will your partner's exit be at a set valuation or scale with future EBITDA? Think about what implications this has for your respective motivation/incentive structure.
4) Is your partner's timeline to exit fixed? If not, what kind of notice does he have to give you about his exit plans?
5) Are you obligated to buy his share? Can he sell to someone else? If he sells to someone else are you allowed or obligated to participate? Do you have a right of first refusal?
6) Is he ever obligated to buy your share? Can you sell to someone else? If you sell to someone else is he allowed or obligated to participate? Does he have a right of first refusal?
7) What happens in a "bad leaver" event? i.e. fraud, bad faith, or someone simply quits/abandons the partnership? Is there repurchase obligation or a straight forfeiture? This will vary based on circumstances of "bad leaver" exits.
8) What happens if someone becomes disabled or dies? Is there keyperson insurance required for either of you to carry? Who pays for it? What are the repurchase scenarios in no-fault exits?
Fortunately a good lawyer familiar with Joint Ventures can guide you on many if not all of these questions. Whatever you do, don't enter into a partnership with unanswered questions. These issues become infinitely more complex to sort out when they're not explicitly handled in the operating documents. A buyer-seller fit is much easier to align because partnerships are inherently messier. I'm biased but I do believe that a good partnership with well-aligned incentives is a fantastic structure, but if incentives aren't aligned and your operating documents aren't clear on what the goals and rules of the partnership are then you're setting yourself up for big trouble.
from University of Pennsylvania in Seattle, WA, USA
Some concerns to consider: 1.) Is the price you can eventually buy the owner out pre-determined or will you be paying for the growth that you drive over the next few years (EBITDA multiple) 2.) Are they committing to selling out by a certain date and to you? I would want something in writing. I know someone who was verbally promised buying in at a price and then the owner sold out to a PE firm for a better offer. 3.) You are getting a business and partner - I wouldn't discount the vetting process to ensure you think you can work with the owner and if you come to find out you cannot, how would that be resolved.