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Tuesday
Oct012002

Don't Get Punished For Your Good Deeds

You might be surprised how common it is for the owner of a business or owners of a professional practice to sell an interest in their business or practice to another at a bargain basement price.

Doctors, lawyers and even car dealers have tried to explain to me why it made sense to sell an interest for far less than the interest was worth. And it may make sense to you until your new "partner" demands you repurchase the interest at full value, often times substantially more than he or she paid.

Business owners and professionals all have their reasons for discounting their sale price. Often times the reasons are competitive, they need to make it easy to buy into the "partnership" in order to attract good talent. Other times, the deal is struck because the business owner believes he or she will receive future benefits from the new association. Do these arrangements work out? Sometimes yes, sometimes no.

Sometimes a new partner in a law firm will meet expectations, other times he or she will not. Sometimes doctors are committed to a medical practice throughout their entire professional career, other times a physician will want to move to another community for any one of a number of reasons. Sometimes a new partner will contribute to the business as expected, other times the new partner will not.

If you are going to sell an interest in your business or professional practice to another at a discount, then make sure you do not have to pay top dollar if the arrangement does not work out.

I can give you a number of local examples where a person bought at a discount but wanted full value, if not more, to resell their interest as they left the business or professional practice. Imagine that you allow someone you trust to purchase an interest in your business for a fraction of its true value and, when they leave, they demand that you pay full price to repurchase that interest. I have seen it happen time and time again.

Can business owners fight these ungrateful turncoats? Legally yes, often times, however, practical options may be limited. There are a number of legal theories that can be used to fight a full value repurchase. The best approach, however, as always, is to use preventative strategies up front to prevent potential problems in the future.

DON'T - Don't sell an interest in your business or professional practice at a discount without entering into an agreement that protects you in the event you repurchase that interest.

DON'T - Don't automatically assume, when negotiating and drafting an agreement, that your new "partner" will eventually buy you out. That may be your goal and, if so, I hope it works for you. However, many times over the last 17 years as a lawyer, I have seen parties negotiate agreements assuming they would be the seller and, when circumstances change, they end up as the buyer.

DO - Do negotiate a buy-sell agreement before you convey an interest in your business or professional practice to anyone - even family.

DO - Do recite in your agreement the fair market value of the interest you are transferring and the actual price paid by your new "partner."

DO - Do state your expectations for your new "partner." Whether you expect them to run the business so you can cut back, eventually purchase the business so you can retire or contribute a certain economic benefit so that you both gain from the partnership, spell it out.

DO - Do provide a repurchase mechanism that reflects any discount you may have given at the time of original sale. This way you can avoid the problem of "selling low and buying high."

DO - Do consider phasing in the purchase over time after certain stipulated performance requirements are met.

DO - Do remember that if your "partner" does not work out, you do not have to concede to their demands. Notwithstanding their ownership, there may be a number of ways to prevent an unjust result. If you follow these preventative strategies, you may be able to avoid those types of problems altogether.

DO - Do consult with experienced legal counsel to draft appropriate agreements BEFORE you transfer an interest in your business or practice. By clearly defining your expectations up front, you will be able to prevent many problems that can occur down the road.

As always, we are here to help you with your legal needs. Feel free to call me at any time at 541-345-2325 or email me at athayer@ptlaw.com. If we do not handle the area of your particular need, it is part of our service to you to make sure you consult with an experienced lawyer who can help you.

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