Another buy-sell gone bad for lack of appraisal method

BVWireIssue #60-3
September 26, 2007

Two partners in an educational marketing company tried to negotiate a buy-sell price for their respective ownership interests after one partner had already resigned.  That was the first “bad” fact in Cardon v. Testout! Corp. (10th Cir., August 2007).  Second: The company had suffered recent financial losses, further straining the partners’ relationship. Third, their partnership agreement provided a buy-sell price (percent ownership times a multiple of net income) for only three years after the inception in 1992, but their employment agreement required the departing owner to sell back his shares when he resigned in 2000.  Finally, the ousted owner accepted a low-ball price for his shares, only to find out later that the company’s finances had improved.  Litigation ensued in 2003—and given the 10th Circuit’s dismissal of certain state fraud claims without prejudice, the conflict and cost continue to this day.

They could have used this free BVR download—and Mercer’s book.   “The best time to think about what happens if the business…doesn’t work out is when the business is being formed and the…owners are happy,” writes John Stockdale, Jr., BVR editor, in “Recent Cases Highlight Problem Areas in Buy-Sell Agreements.”   The article originally appeared in Value Matters™ (Mercer Capital) and is now available as a free download at BVResources. Business owners, their financial advisors and appraisers, will want to check out Mercer Capital’s Buy-Sell Agreements: Ticking Time Bomb or Reasonable Resolution?, available here.

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