So You Want to Buy Out Your Partner? Grab a Calculator (and a Lawyer)

Many shareholders have come to me saying that both sides want to separate, and there is an agreement about who will buy out who. But they can’t agree to a price, since the minority and majority shareholders have different opinions on the value of the company. Fortunately, however, a disagreement on value is often the easiest dispute to resolve.

The parties may agree to hire a business appraiser, but that is just the start. When the appraiser comes up with a number, is it binding or just the beginning? Must the parties be wedded to whatever number an appraiser comes up with? Agreeing to an appraisal – sight unseen - can be pretty scary. But getting an appraisal that is not binding can be scary too, since the one who does not like the number can simply walk away.

There are various ways to deal with both issues. There are methods to ensure that the number is fair – for example, by allowing a second appraisal if one of the shareholders does not like the first. Competing appraisals could be dealt with in a brief, binding hearing before an arbitrator, or simply be averaged if they are close enough. In other words, there are ways to make the process binding, without being wedded to a particular appraisal with no fail-safe mechanisms.

Of course, the pesky issue of minority and marketability discounts still must be addressed. Often there is not a great disagreement about what percentage such a discount should be. Rather, the issue is whether it should apply in the first place.

I have seen many litigations in which the parties agreed there should be a buyout, agreed who should be the seller and who the buyer, and didn’t even disagree that much on the value. The sole remaining issue was whether discounts should apply. Parties have spent hundreds of thousands of dollars on legal fees to determine if a 30-35% discount should apply to a buyout. Often, both sides would have been better off – sometimes much better off - simply agreeing to a 15-17% discount at the outset. But discounts are tricky, since they usually do not apply unless there is wrongdoing. I’ve written on qualifications for discounts in my blog “Value May Be an Obstacle Even with Agreement About the Need for a Buyout.” So the discussion about discounts often leads to a discussion of wrongdoing, and the deal suddenly becomes less amicable.

If you can negotiate a buyout with your business partner but are having trouble nailing down the details, please do not wait until you have an agreement in place and simply want an attorney to “document” it. Many times clients have done exactly that without even considering the issue of discounts. Get an experienced shareholder dispute attorney involved early in the process, an attorney whose aim is to avoid legal fees, not collect them.

Please do not hesitate to reach out to me at dcroberts@norris-law.com.

About the Author – Business Divorce in NJ

David C. Roberts, Chair of the firm, specializes in complex commercial litigation, including fraud, trade secrets, and restrictive covenants, with a focus on business partnership and shareholder disputes in New Jersey. Known as business divorce litigation, these disputes often involve shareholder and LLC member oppression, embezzlement, owner freeze-outs, dissenter’s rights, and efforts to dissociate or expel an owner. Dave strives to resolve matters through mediation but is a seasoned trial attorney when needed. He frequently writes and lectures on minority shareholder disputes. With extensive experience representing both minority shareholders seeking buyouts and majority owners defending against such claims, Dave offers unique insight into the strategies and challenges of business disputes, particularly in family-owned companies.