Holding Strategies Exit Strategy For Partnership Interests

Partnerships or joint ventures are excellent vehicles for blending diverse investing interests into a cohesive business entity. One partner may put in nothing but money, another may put in both money and expertise, a third may contribute land. The documentation binding them together requires careful planning, this is particularly true when they are not equal partners with equal control. It is likely at some point in time that the desires of various partners may not be the same. One may want to sell the property and another may notThe solution is a divorce mechanism that is fair and equitable. A typical provision often used in two-party partnerships is what is commonly called the “shotgun clause.” The clause provides that if either party wants to sell, he contacts the other party and says, “I want you to buy me out and here’s what I want for my interest.” The other party either elects to accept the offer or can elect to sell his share to the other party for the same amount of money properly adjusted for varying percentage interests. While this provision seems fair, it has many potential pitfalls. The major one exists when the parties are not financial equals. The partner with limited funds is at a distinct disadvantage. Another disadvantage is the timing may not be right for a buyout if there are more cash calls imminent that cannot be met. Another apparent solution is to permit a partner to sell his interest in the partnership after first offering it to the other partners. This concept is not really an equitable solution for anyone. Who is willing to pay full value for a partial interest in a partnership with partners they don’t know? Certainly the remaining partners don’t want to deal with a stranger who suddenly becomes their partner.
If someone buys that interest at a highly discounted price, he may be doing so solely for the purpose of tormenting the other partners to a point where they, too, will sell their interests at a bargain price just to buy peace. A better approach and one that is fair and equitable for all partners goes like this: Partner A wants out. He obtains a bona fide offer for the entire property that he is willing to accept. He notifies all other partners of his intention to sell and they have two options. One, they can elect to buy the share of Partner A and pay him what he would have received if the sale were made or two, they must join in the sale. This completely eliminates any monetary discount for a minority interest and the possibility that remaing partners will have to deal with a stranger..

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