Mobe Affiliate Program :Repurchase Rights

Mobe Affiliate Program Review – Picture this: You own a small catering company. It is doing relatively well, but you lack the funds and the skills to grow it. Your friend owns a food delivery business and he is facing the same problems. You realize that between the two of you, you have the necessary finances and skills to create a very successful catering and delivery company so you decide to pool resources and create a new business entity. You’ve now entered a joint venture.

You go over details of profit generation responsibilities, costs, and other nuances associated with running the business. Everyone is in agreement, so you decide to talk to your lawyer and formalize the venture.

The first question he asks is, “What if your partner leaves the company or becomes incapable of working?” It is very important to have a definitive answer to this question. You should have a clear exit strategy in the event the partnership is no longer viable, otherwise, you might find yourself stuck with a partner you don’t want.

There is no specific legal process for dissolving a joint venture. It is dictated by the agreement between the partners and it is important to have a clear agreement drawn at the beginning of the venture. One of the most common way to address joint venture resolution is to draft a repurchase rights agreement, commonly known as a buy-sell agreement.

A buy-sell agreement outlines the procedures the partners in a joint venture should follow in the event any of them cannot take part in the business anymore, be it because of death, disability, bankruptcy, or that they just want to leave.

A buy-sell agreement will usually contain several clauses that stipulates how the venture should be dissolved. This article looks at the most important clauses you need to thoroughly discuss before you sign the agreement.

1. Repurchase Rights and Obligations

Discuss what a departing partner is required to do with their shares and the expectations for the surviving partners as well. Does the departing partner have to sell exclusively to the surviving partner? Is the surviving partner obligated to buy?

This clause usually has either of the following outcomes:

  • It permits the surviving partner to have 100% ownership by buying the other’s share. The departing partner cannot sell their share to anyone else.
  • It prevents undesirables from owning stock in the company. The clause will outline what type of investors or owners the departing partner can and cannot sell to.
  • It allows for a liquidation of the departing partner’s shares

You can also agree to mix the conditions to come up with a hybrid that works best for the parties involved. For example, you might not want to be obligated to buy your partner out, but may want first preference, and they can only sell to others once you opt out.

2. Transfer Restriction

Most agreements will prohibit partners from selling, assigning, gifting, loaning, pledging, or transferring their shares unless under specified circumstances. This clause outlines all the circumstances that permit asset transfer and how to handle each situation.

The most common circumstances that allow the departing partner to sell their share to an outside party include:

  • A refusal by the surviving owner to buy the departing partner’s share, especially when the departing partner already has a genuine offer from a third party.
  • A death or disability of a shareholder, in which their estate is passed on to their heir or guardian. The recipient of the shares will still have to follow the basic conditions of the initial agreement.
  • A divorce by one of the shareholders, in which case their share can be transferred by a court order. You have little control in this situation, except to get the spouse to sign an agreement to provide for repurchase at a fair valuation.
  • Filing for bankruptcy by one of the partners – A courteous partner would trigger a buyout before they file for bankruptcy. Should they file before a buyout, this could be detrimental to the company as it might end up in the liquidation of their assets. You can trigger a buyout if you have reasons to believe your partner is headed towards bankruptcy.

3. Purchase Price

Partners can set the purchase price in a buyout however they want. The most common methods of setting prices are:

  • If the departing partner has a genuine offer from a third party, the surviving partner will have to match the price offered.
  • Use of a pricing formula that takes into account the current revenues of the company multiplied by a certain number. For example, if the partners agree on a two times revenue method as a purchase price and the company has revenue of $100,000, then the selling price will be $200,000.
  • Venture partners can also agree on an appraisal method of price setting, where they will get a banker to do an evaluation of the company’s assets and the value of the departing partner’s shares, then set a purchase price.
  • There is the mutual option method, where partner A sets a valuation price, usually based on fair market price, and partner B elects to buyout or sell to partner A.

4. Payment

The payment clause outlines how the agreed payment is to be made. In the case of right of refusal, the payment has to be made in the same manner as the one proposed by the third party offering to buy.

Because it is a large sum of money, most partners will opt to allow payment installments even if the third party offered a one-time pay.

In other purchase price setting methods like appraisals, valuations, or formulas, the payment process is set at the beginning of the agreement and partners have to adhere to it. Usually a portion of the payment is made at closing and the rest is paid over time.

A joint venture can be helpful in getting enough resources and funds to launch or grow your business, but entering into one blindly is a dangerous, even if it is with someone you trust. Drawing up a repurchase rights agreement is a way to protect your assets and avoid any confusion about what the procedures will be should the venture be dissolved. Click Here For More Information About To Start Your Business

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