This is Part 2 of a two-part series on triggering a buy-sell. This week we will consider three more factors to weigh when invoking a buy-sell in a partnership dispute.
As discussed in last week’s installment, the calculation of the purchase price for the partnership interests under the buy-sell often involves starting with a theoretical purchase price for all of the assets of the venture and then running it through the distribution waterfall to determine the amount that each partner would receive in a sale of the partnership assets at the named price.
The partners may not agree on how the waterfall is applied. For example, if the venture has not kept complete and accurate records of all capital contributions and partner loans, there could some dispute as to who is due what. Any disagreement about the application of the waterfall will need to be resolved before the buy-sell can close. If your partner wants to delay the execution of the buy-sell, it may be possible for them to dispute the application of the waterfall.
Before commencing the buy-sell procedures, it is important to understand how the purchase price is calculated, how the distribution waterfall works and how much room for disagreement there might be in applying the waterfall as required by the buy-sell provisions.
2. Interim Management
The buy-sell procedure may trigger a change in who controls the management of the joint venture. For instance, sometimes the terms of the buy-sell will provide that once it is determined which partner will be the buyer, that partner will be given the exclusive power to control the day-to-day management of the company.
This aspect of the buy-sell could be a crucial factor in your buy-sell strategy. If you are a non-managing partner with major decision rights only and no control over the day-to-day management of the venture, exercising the buy-sell could give you the opportunity to take action, make changes or gain insight into the management and operations of the venture. On the other hand, if you are the managing partner you may be wary of losing that day-to-day control during the pendency of the buy-sell.
3. Assignment of Assets/Transfer of Files
Even as you are paying close attention to all of the terms of the buy-sell, equally as important may be what is *not* included in the buy-sell. If you are the buyer, it is important that you get everything you need to operate the venture.
Often most, if not all, of the assets used in the venture’s business will be owned by the joint venture entity itself and will not need to be separately assigned. However, there could be assets that are in the name of one of the partners or an affiliate, for example, permits, vehicles, equipment, alcoholic beverage licenses, service contracts or any number of other assets needed to run the business. The buy-sell provision may or may not contemplate the separate assignment of these items, but it is important to account for them one way or another.
In addition, possession of all of the books and records and other files relevant to the business of the venture must be transferred to the buyer. The buy-sell may not provide for the transfer of files, but you may find yourself without necessary documents and little leverage to demand them if you do not address this issue at the closing of the buy-sell.
Before triggering a buy-sell, consider these six factors so that you will be better prepared for the events that may follow.