Juan is considering the purchase of a 10% share of a business with a great business plan in a new industry. The founder will retain 90% ownership. Juan expects to pay 10% of the full value of the company. A full-valuation has been done by an independent valuation specialist. What risk might Juan have?
He could have risk of not being able to market his small share of the business and/or a lack of control.
In valuation practices, there can be a great discount in value of such shares. This meaning Juan could buy at a full value but not be able to sell or help to control and thus have to sell at a much lesser amount, if at all.
Juan may want to consider an operating agreement that says
- expenditures (including investments) over xxx you have an equal say in
- can’t sell the company without your approval
- have to offer company to you prior to a sale (like a first right of refusal)
- hiring/wages//terminating of key staff you have a say in
- distributions will be xxx
- other owner’s wages/benefit require your approval
- could be a guaranteed buy out of you under certain circumstances
- life policy on other owner to cover your purchase or the estate purchase of you or some such
- buy out of you in case of their divorce or disability (however defined)
- monthly reports
- notice of any claims against/defaults/drop below certain asset levels etc of some level/value
- participate in planning process with veto of some parameters
- you can transfer these rights to someone you might sell to (they will want some approval process not unreasonably withheld)
To name a few.
The seller, to make such agreements, will likely want some similar, counterbalancing protections.
Attorneys should be consulted and perhaps a CPA or insurance expert.