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Buy-Sell Provisions: and The Kid Cutting The Candy Bar

February 9, 2017 // R. Shawn McBride // No Comments »

I spend a lot of my time setting up partnership agreements in different forms — working to make businesses that work economically with multiple involved. One of the things I always tell my clients is we need to protect their wealth. We need to make sure no matter what happens, that wealth that everybody has worked so hard to create, that they’ve contributed time and energy to, is indeed protected.

One of the typical ways to protect the wealth of business owners and partners is using some form of buy-sell provision.  A buy-sell provision simply allows one owner to buy out the other if that becomes advisable for the future of a company. The goal is to have provisions in the company documents that allow the ownership to get realigned if the early owners of the company become unable to work with each other.

There could be for a variety of reasons a buy-sell provision could be triggered. The reasons don’t really matter, but often it’s a disagreement about the future and the direction of the company. In those cases, rather than go to the courthouse and spend all that time litigating over the future of the company, and possibly getting a receiver appointed who has no knowledge or care for the company, what’s often better is to have some kind of exit mechanism in place.

That exit mechanism is often a buy-sell provision. These buy-sell provisions come in many different forms. Often what we use in these cases is what a lot of people call a “push pull provision.” It’s a fancy word, if we’re talking about a situation where one partner will make an offer to the other partner, and the other partner will decide if they’re the buyer or the seller. Then the first person sets the price and the second person determines who buys and who sells.

This is an inherently fair provision (at least on the surface) because it means that the first person has to make a reasonable offer because they don’t know which side of the deal they’re going to be on.

It is very much like that kid cutting the candy bar. You remember when we were children you would hand the candy bar to one kid who would cut it in half, then the other kid would decide which half they wanted to keep. The first kid is usually very careful to cut the candy bar exactly in half, because they don’t want to get the smaller half. Here you can use the same logic in your business. It’s an artful way to do things, and certainly something you should keep on your radar.

However, it can be gamed by liquidity of one party or in certain situations so it’s not as perfect as it looks on paper.  When it comes time to set-up a buy-sell provision for a business that matters you want to make sure you get this one right.  Read up on it, and if the stakes are high hirer a professional to help you get it right.

What’s been your experience? How have you dealt with the possibility of disagreement with your partner? Do you have provisions in place to protect you, to protect your wealth? Join us in the comments below.

Fair provisions so everyone is happy.

Realign business.

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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique.  Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Thad Zajdowicz.

 

About the Author

Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment (www.rshawnmcbridelive.com), gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can reach R. Shawn McBride at info@mcbrideforbusiness.com or (214) 418-0258.

 

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