Business Buyout Agreements - Part II

This is the final article on business buyout agreements. In Part I we've covered the basic situations where it's prudent for business owners to create buyout agreements. We've discussed the major components of the buyout agreements, addressing the circumstances under which co-owners can compel each other to sell their interest in business, the right of first refusal and forced buyouts. The main question that still needs to be answered is how to calculate the appropriate price of business, and what will be the payment terms. We address this and other issues below.

Methods of valuation To prevent lengthy and foreseeable disputes over the appropriate value of the share, valuation method must be agreed upon.

Independent appraisal With this method, a third party neutral professional appraiser (preferably, a pre-selected one) determines the value of the company. The main advantage to this method is that it uses an objective and flexible standard which reflects the current value of the business, taking into account such difficult to value assets as company's goodwill, reputation and earnings potential. The main drawbacks are that it takes time and can get expensive.

Earnings capitalization With this method, you take company's gross revenue, subtract costs, and multiply this figure by a certain agreed-upon number (capitalization rate). The advantage of this method is that it is quick and relatively easy to calculate the value. The main drawback is that the final number may not represent the true value of the company. For example, the company may not show much profit, and yet have great real value, if you reinvested nearly all profit back into the healthy, growing company. To account for this, you may decide to multiply company's gross revenue, rather than pure profit.

Book value Book value is company's assets minus liabilities. The advantage of this method is its simplicity but the main drawback is that it does not account for earnings potential, especially if the company is new. To account for this drawback, you may decide to use a multiple of book value, where you multiply the book value by a certain agreed-upon number.

Other issues An effective buy-sell agreement should address the following issues:

- Should the agreement be guaranteed by pledging corporate assets, personal guarantees, loans, etc.?

- How to allocate shareholder loans?

- Should there be a covenant not to compete?

- Should the spouses of the shareholders sign the buy-sell agreement? What if they will not?

Partnership Disputes Resolution

Dealing with partnership disputes can be demanding, time-consuming and a very unfamiliar experience, particularly if this is the first time a partnership has gone sour for you.

As a disgruntled partner in a business, it is easy to get upset and frustrated with the person you have a dispute with. However, it is best to stay as calm as possible and analyse the options you have available. By choosing the best option you will improve the chances for that your reputation, your business and your partnership stay intact with the minimum damage possible.

The best thing that you and your partner or partners can do is come to a resolution, but this is dependent on the severity of your particular case, and also on what is outlined in the written partnership agreement. Poor communication and personality clashes are a common cause of partnership disputes, and negotiation may be all that you need to come to a resolution; you don't even need to involve third parties. Secret profits may be another reason why you and your partner have fallen out, if your partner hasn't disclosed some of the profits that your company has made.

Mediation is another method that is frequently used in a business partnership dispute. Mediation involves the use of a specially trained third party, but is usually a cheaper, faster and more cost efficient option than court. This neutral third party will help to bring both you and your partner to a resolution that they both agree on. Mediation is more structured than negotiation, and all details are kept confidential, making it more likely that reputations remain intact.

Arbitration is a legal technique used to resolve partnership disputes. The arbitrator acts as a private judge, and the partners are bound by the arbitrator's decision. You and your partner can choose the arbitrator, by choosing someone with the right credentials who can understand any technical or complex issues in the dispute makes a resolution more likely. You may find arbitration to be quicker, more flexible and cost-effective, minimising hassle and expenditure. However, there can be many downsides to arbitration, it can become complex and costly and even require court proceedings to legally enforce some of the arbitrator's rulings.

If negotiation, mediation or arbitration don't work, litigation is usually your only other option is a business partnership dispute. However, litigation can often lead to dissolution of a partnership, if the partnership dispute is that serious that you and your partner end up in court.

How a Business Partnership Dispute Can Arise From An Incomplete Partnership Agreement

Most partnerships in business will be governed by a partnership agreement. However problems arise when the agreement is of a poor standard and a partnership dispute comes up.

A business partnership is like many romantic partnerships. It starts great, but after a while cracks may begin to form and a business partnership dispute can arise. This is why it is of paramount importance to have a written agreement in place at the point when the partnership is formed. It may seem awkward to suggest a formal agreement, especially if your business partner is a family member or friend. However, in this situation you must put the awkwardness to one side and create a written agreement that covers all the necessary angles. If you don't have any formal written agreement then you'll partnership is governed by the Partnership Act of 1890- and you may find that, being bound by the Partnership Act, you are lumbered with provisions that you wouldn't have chosen yourself.

A written partners agreement is not legally required, but may save a a large amount of hassle if things turn sour between two partners, and a business partnership dispute arises. If you think you may not have covered all the bases, you can seek legal advice from a specialist business law solicitor in preparing your partners agreement. This will make things easier if the partnership falls apart somewhere down the line. Anyone without previous experience of a business partnership is unlikely to know exactly what needs to be included. Some partners agreements can be very complex, in which case it is highly advisable to seek professional advice from someone who can assist you.

Amongst the useful source provisions that you need to include in a written partners agreement are allocation of profit and loss, what happens if a partner dies, conflict resolution, and many more. You would be surprised at how many people overlook some of the most important aspects when agreeing to the terms of a written partnership agreement, but this can cause significant problems in the future.

Some people think that they are totally covered for every eventuality just by the mere fact that they have a written partnership agreement. However, most people in business know that there are many complexities and changes that can arise with a business, meaning that partners may not see eye-to-eye, or one partner wants to leave. It is vital that all of these aspects are covered. Then, if a business partnership dispute arises, a great deal of time and money will be saved because everything has been clearly defined.

Remember the old saying "Fail to prepare, prepare to fail."

Partnership Disputes Resolution

Dealing with partnership disputes can be demanding, time-consuming and a very unfamiliar experience, particularly if this is the first time a partnership has gone sour for you.

As a disgruntled partner in a business, it is easy to get upset and frustrated with the person you have a dispute with. However, it is best to stay as calm as possible and analyse the options you have available. By choosing the best option you will improve the chances for that your reputation, your business and your partnership stay intact with the minimum damage possible.

The best thing that you and your partner or partners can do is come to a resolution, but this is dependent on the severity of your particular case, and also on what is outlined in the written partnership agreement. Poor communication and personality clashes are a common cause of partnership disputes, and negotiation may be all that you need to come to a resolution; you don't even need to involve third parties. Secret profits may be another reason why you and your partner have fallen out, if your partner hasn't disclosed some of the profits that your company has made.

Mediation is another method that is frequently used in a business partnership dispute. Mediation involves the use of a specially trained third party, but is usually a cheaper, faster and more cost efficient option than court. This neutral third party will help to bring both you and your partner to a resolution that they both agree on. Mediation is more structured than negotiation, and all details are kept confidential, making it more likely that reputations remain intact.

Arbitration is a legal technique used to resolve partnership disputes. The arbitrator acts as a private judge, and the partners are bound by the arbitrator's decision. You and your partner can choose the arbitrator, by choosing someone with the right credentials who can understand any technical or complex issues in the dispute makes a resolution more likely. You may find arbitration to be quicker, more flexible and cost-effective, minimising hassle and expenditure. However, there can be many downsides to arbitration, it can become complex and costly and even require court proceedings to legally enforce some of the arbitrator's rulings.

If negotiation, mediation or arbitration don't work, litigation is usually your only other option is a business partnership dispute. However, litigation can often lead to dissolution of a partnership, if the partnership dispute is that serious that you and your partner end up in court.

Business Buyout Agreements - Part II

This is the final article on business buyout agreements. In Part I we've covered the basic situations where it's prudent for business owners to create buyout agreements. We've discussed the major components of the buyout agreements, addressing the circumstances under which co-owners can compel each other to sell their interest in business, the right of first refusal and forced buyouts. The main question that still needs to be answered is how to calculate the appropriate price of business, and what will be the payment terms. We address this and other issues below.

Methods of valuation To prevent lengthy and foreseeable disputes over the appropriate value of the share, valuation method must be agreed upon.

Independent appraisal With this method, a third party neutral professional appraiser (preferably, a pre-selected one) determines the value of the company. The main advantage to this method is that it uses an objective and flexible standard which reflects the current value of the business, taking into account such difficult to value assets as company's goodwill, reputation and earnings potential. The main drawbacks are that it takes time and can get expensive.

Earnings capitalization With this method, you take company's gross revenue, subtract costs, and multiply this figure by a certain agreed-upon number (capitalization rate). The advantage of this method is that it is quick and relatively easy to calculate the value. The main drawback is that the final number may not represent the true value of the company. For example, the company may not show much profit, and yet have great real value, if you reinvested nearly all profit back into the healthy, growing company. To account for this, you may decide to multiply company's gross revenue, rather than pure profit.

Book value Book value is company's assets minus liabilities. The advantage of this method is its simplicity but the main drawback is that it does not account for earnings potential, especially if the company is new. To account for this drawback, you may decide to use a multiple of book value, where you multiply the book value by a certain agreed-upon number.

Other issues An effective buy-sell agreement should address the following issues:

- Should the agreement be guaranteed by pledging corporate assets, personal guarantees, loans, etc.?

- How to allocate shareholder loans?

- Should there be a covenant not to compete?

- Should the spouses of the shareholders sign the buy-sell agreement? What if they will not?

How a Business Partnership Dispute Can Arise From An Incomplete Partnership Agreement

Most partnerships in business will be governed by a partnership agreement. However problems arise when the agreement is of a poor standard and a partnership dispute comes up.

A business partnership is like many romantic partnerships. It starts great, but after a while cracks may begin to form and a business partnership dispute can arise. This is why it is of paramount importance to have a written agreement in place at the point when the partnership is formed. It may seem awkward to suggest a formal agreement, especially if your business partner is a family member or friend. However, in this situation you must put the awkwardness to one side and create a written agreement that covers all the necessary angles. If you don't have any formal written agreement then you'll partnership is governed by the Partnership Act of 1890- and you may find that, being bound by the Partnership Act, you are lumbered with provisions that you wouldn't have chosen yourself.

A written partners agreement is not legally required, but may save a a large amount of hassle if things turn sour between two partners, and a business partnership dispute arises. If you think you may not have covered all the bases, you can seek legal advice from a specialist business law solicitor in preparing your partners agreement. This will make things easier if the partnership falls apart somewhere down the line. Anyone without previous experience of a business partnership is unlikely to know exactly what needs to be included. Some partners agreements can be very complex, in which case it is highly advisable to seek professional advice from someone who can assist you.

Amongst the useful source provisions that you need to include in a written partners agreement are allocation of profit and loss, what happens if a partner dies, conflict resolution, and many more. You would be surprised at how many people overlook some of the most important aspects when agreeing to the terms of a written partnership agreement, but this can cause significant problems in the future.

Some people think that they are totally covered for every eventuality just by the mere fact that they have a written partnership agreement. However, most people in business know that there are many complexities and changes that can arise with a business, meaning that partners may not see eye-to-eye, or one partner wants to leave. It is vital that all of these aspects are covered. Then, if a business partnership dispute arises, a great deal of time and money will be saved because everything has been clearly defined.

Remember the old saying "Fail to prepare, prepare to fail."