Members, shareholders or partners departing from an established business must have a clean exit. Whether leaving on your own or being bought out, clearly define obligations on both sides. Here are some of the considerations to keep in mind when negotiating and documenting a CLEAN exit.
Clearly defined financial obligations on both sides and compensation to the departing partner or shareholder which makes sense. Monies to be paid, and when, should be articulated and set in writing. Do no leave this to interpretation or later adjustment or negotiation.
Liability. Address all liability issues before a departure. For instance, in a closely-held LLC or corporation, it may be possible to negotiate an agreement where the remaining members/shareholders pledge their member interests/shares as collateral for payment. Additionally, if you are the departing member or shareholder, its going to be important that you obtain a release from the company/LLC for liability for future operations. It is also important to be removed from any financial obligations the company may owe to lenders, bonding companies, factors, mortgages, etc.
Enforceability is key. What good is a buyout agreement if you do not have a strong mechanism to get paid in a default? While the use of a confession of judgment is difficult in New Jersey as compared to New York, there are other available strategies to streamline enforcement. You may also want to consider alternative dispute resolution provisions to keep the costs of litigation down.
Accounting. You must ensure that you have received proper accounting advice concerning the transaction. The structure the payments should have three goals. 1) To create the maximum financial benefit to you. 2) To ensure that you have considered all tax ramifications of the transaction. 3) To make sure that your interest has been properly valued. Our firm routinely calls upon several trusted accounting firms in this process.
No trap doors. I’m often amazed to see buyout agreements that don’t pre-emptively address all potential traps for the departing member or shareholder. These failures are evident when litigation erupts later. By way of example, it is important to be sure that there are no lingering “shareholder loans” on the books of the company. Fully vet and understand the disposition of those loans. If a company forgives a shareholder loan on the books, there could be tax consequences to the departing shareholder. Also, accelerate the payment of financial obligations if there is a change in control of the company after the signing of the agreement. Those are just a few of many traps that may exist, and those trap doors must be nailed shut.
Keep these considerations in mind for a CLEAN exit. Please contact me for help handling a partnership dispute, or with any other business owner issues.