There Is A Problem In My Closely Held Minnesota Business. When Can I Buy Or Sell?

It depends. In many cases, your company’s foundational documents will provide a dispute resolution method and a buyout calculation. However, these documents could also be silent on the issue or leave important questions unanswered. A lawyer who handles closely held businesses can evaluate your company’s foundational documents and help you determine a fair buyout price.

What Is A Fair Price For A Buyout/Sellout After A Dispute?

You own part of a closely held business (a partnership, a small corporation or a limited liability company (LLC)). Over time, differences have arisen with one or more of the other owners, and now things have hit the boiling point. You want out – or you want them out.

However, your business’s formational documents probably restrict when you can buy someone out or get a buyout yourself. My first step is to consult those documents – your shareholder agreement, operating agreement or partnership agreement – to determine when you can exit or force someone else out. Most importantly, the foundational documents may lay out exactly how your ownership interest would be valued.

If they do, we can use the specified formula to determine your share price and you will have your answer (absent any other disputes). Unfortunately, it often isn’t that simple.

When The Foundational Documents Are Silent Or Incomplete

Many business owners never put into their foundational documents exactly how to determine share prices in the event of a buyout. They may never have thought of adding a dispute resolution clause. In other cases, the dispute resolution clause is incomplete because it doesn’t address what should happen when the owners disagree on the share price.

The difference between doing an EBITDA (earnings before interest, taxes, depreciation and amortization) calculation on a cash basis vs. an accrual basis, for example, might reach into the millions. If you are looking at millions of dollars of difference between your calculation and the company’s calculation, what happens next?

Negotiation, Mediation, Arbitration Or Court?

Your foundational documents may also say that, in the event of a dispute, you agree to arbitrate. If so, you would typically move forward by getting an attorney and building your case for arbitration much as you would for courtroom litigation.

If not, you may wish to hire an attorney to negotiate further, enter into mediation or proceed to court. If you go to court, however, you should know that the judge could:

• Order a buyout at a specific price
• Order the parties to sell the business and divide the proceeds
• Close the business

If the judge ordered the sale of the business, it could go at fire-sale prices, and no one would get their asking price.

In some cases, further negotiation or mediation can resolve the dispute prior to protracted litigation.

Expert Witnesses

If your governing documents offer a clear calculation of book value, your own accountants may be able to run that calculation.

If they specify an EBITDA calculation, you will likely need a business appraisal expert to perform it and testify at trial. If part of your ownership interest involves real estate, you might also need a real estate appraisal expert.

Conclusion

When considering a buyout or forced sale of shares, there is a lot to take in. I help clients understand what their foundational documents specify and whether there is another way of looking at the issues. Then, I work to handle the buyout/sellout using the most cost-effective method and pursuing any other rights you may have as an owner.