Thursday, July 12, 2007

Lessons From My Dad - Fair Buyouts

In business deals, sometimes one partner wants to get out while the other partner wants to stay in the business. It is often difficult to arrive at a fair price for half the business. My dad once shared a fair buyout clause for this situation, which I have always remembered.

The strategy is based on a simple fair sharing technique used with children. Basically, when dividing a piece of pie in two, one child cuts and the other child chooses. The child doing the cutting will typically make the two pieces as close to 50% as possible. Controlling only part the activities related to the transaction drives fairness.

In business, the same approach can be used when one partner wants to sell and other partner doesn't The selling partner, A, sets the price and B decides whether to buy from or sell to A. A is obligated to follow B's decision. Thus, if A sets too high a price, he may need to purchase B's shares. It's in the interest of partner A to set price at which A thinks is fair to buy and still be able to sell it to a third party.

This approach has always appealed to me as a good exit strategy from a partnership. It drives a higher level of fairness by both partners and significantly reduces negotiating time. If I ever should form a business partnership, I will make such a exit clause part of the contract.

For more on Crossing Generations , check back every Thursday for a new segment.

Photo Credit:, Andrea Church

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

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