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DECEMBER 23, 1999

SMART ANSWERS
By Karen E. Klein

When It's Time to Say "Adieu," You'll Be Glad You Have an Exit Agreement
Partners should draft the terms for departure while their relationship is fresh


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Q: I am president and part-owner of a small corporation that provides consulting services to insurance carriers. I have one partner, who is also a part-owner. We are attempting to institute an "exit agreement" in the event either of us decides to withdraw from the corporation. Can you provide some information on such pacts and also on how a privately held corporation is valued?

---- P.H., Orlando

A:A formal exit agreement allows an equity partner to leave a business as amicably as possible and with minimal upheaval at the company. You and your partner are wise to think about adding one to your partnership agreement, perhaps as an addendum. Too often, working relationships dissolve, and partners resort to unfriendly legal action that they might have avoided had they laid the groundwork for a future separation during friendlier times. Make sure you address not only voluntary dissolution of the partnership but also what happens in case of the death or incapacity of one of the principals.

Make sure you have your exit agreement drawn up by an experienced business attorney so it will stand up — in court, if necessary — when the time comes. There are many possible variations on an exit agreement, but all should address the following essential points, according to Marty Shindler, president of management consulting firm Shindler Perspective, based in Calabasas, Calif.:

— The conditions under which either party can invoke the agreement;

— Whether the company or a specific partner has right of first or last refusal in buying out the departing partner;

— Whether someone else, including an unrelated third party, can buy out the partner's shares;

— The formula for determining the value of the partner's share;

— How long the purchaser can take to pay for the departing partner's share, and what interest, if any will be charged;

— Whether the payout calculation is subject to audit by a CPA, and who pays for the audit;

— What happens in the event of a dispute between the parties over the terms, including any stipulations of mediation or arbitration.

Hire a valuation company. The cost can be $5,000 at the very low end and hundreds of thousands on the high end, says investment banker Peter Cowen of Peter Cowen & Associates, in Westwood, Calif., so choose carefully. "Many companies tout themselves as valuation companies but are not professional," Cowen warns. "Conversely, larger firms charge much more money for some projects when boutiques would be more appropriate." Hiring a valuation company that has experience in your industry is important. One that typically determines value for construction companies is not likely to do a good job with a computer-software outfit, for instance.

For more information on partnerships, buyouts, and business valuations, you may want to purchase one of the many books on the topic. The Partnership Book: How to Write a Partnership Agreement, by attorneys Denis Clifford and Ralph Warner, is available from Nolo Press (www.nolo.com) for $27.97. It includes a chapter about handling the departure of a partner.



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