ES | Exit Strategies Group
A significant concern for the seller of a business who retains a minority position after a sale, is how to sell the remaining shares if things do not work out as expected. This type of sale is commonly referred to as a majority recapitalization.
There are many ways things can go wrong. But since the seller no longer has control over the company, they face the challenge of how to facilitate a final exit.
Imagine that you are the sole owner of a company that you have managed for many years. You decide to sell your company and hire an M&A advisor. After several talks with potential investors, you agree to sell 70% of your company at a fair value to a strategic or financial investor. Since you are no longer in control, you no longer have the final say in strategic and financial decisions. Now assume that you start to strongly disagree with the new majority owner’s decisions regarding the direction of the business. How can you exit the business in an orderly and amicable manner?
The seller (now minority shareholder) and the new investors must plan for these potential outcomes and resolutions in the shareholder’s agreement, at the time that the initial sale is negotiated.
Here is where your M&A advisor and attorney’s experience comes into play. Standard clauses in stockholder’s agreement do not usually contain buy-sell provisions (i.e. a buy-sell agreement) which are intended to ensure a fair and equitable share transfer without a lot of drama, disagreement or delay. Buy-sell provisions are complex and multi-faceted. Two important aspects are to define appropriate trigger events and methods of determining a share price when triggered. The pricing mechanism can be an independent business valuation, a formula, or a fixed-price.
We strongly advocate for buy-sell agreements that rely on an independent valuation for share pricing to overcome the many pitfalls of other pricing approaches. The valuation expert can perform this work on behalf of the buyer and/or seller. Buy-sell agreements can require one, two, or even three valuation experts to determine a final price.
We also strongly advise owners to hire an experienced M&A advisor and transaction attorney to guide them through the entire sale process and advise on the numerous complex issues and decisions that arise during the course of a transaction.