Subject: Employee Buyout Concerns
I’ve been with a small civil engineering firm for around 20 years and became a 5% partner a few years back. The founder, holding the remaining 95%, is now preparing for retirement. We have about 30 employees and primarily operate in PA and NJ.
After a long wait, I finally received a draft buyout agreement from him, and I’m taken aback by some of the terms.
We have a formal valuation placing the company’s worth at $4 million.
Here’s what he’s proposing for the buyout:
- A $250,000 down payment
- A 10-year note for the remaining amount at the lowest permissible interest rate, with a balloon payment due at the end of year 6
- He’ll remain on as president for 2 years, earning a salary of $400,000 (his current pay), plus expected annual raises, Christmas and summer bonuses, and profit sharing
- He retains the title of president and all powers associated with it, including veto authority over my decisions
- My wife and I must provide separate personal guarantees
Currently, I have about $150,000 in equity (from my existing partnership note) and a two-year non-compete agreement that allows me to pursue most of our current clients.
Am I missing something here? This seems absolutely outrageous! Why would this be considered a reasonable deal for me?
Whenever I attempt to discuss the terms with him, he maintains that this is the agreement. He claims it’s open to negotiation, yet every counteroffer I make is swiftly rejected without any discussion.
One Comment
It sounds like you’re in a tough spot, and your concerns are valid. The terms laid out in the draft agreement certainly seem disproportionate, especially considering your investment in the company and your long tenure there. Here are a few key points to consider:
Valuation vs. Price: If the formal valuation is $4 million, paying that full amount while retaining so many of the seller’s powers and benefits does seem inequitable. It’s common for sellers to be motivated by their future security, but the terms should reflect a fair exchange given your investment in the company and your role.
Ongoing Control: Retaining the title of president along with veto power undermines your ability to lead the company effectively. As the new owner, you should have autonomy over decision-making, especially since you are buying the company. This arrangement risks hindering your ability to implement any changes or innovations.
Salary and Guarantees: A $400k salary plus other financial incentives for the founder while expecting you to take on significant financial risk is unusual. As a partner, you should not be responsible for covering excessive costs for someone who is essentially stepping away from ownership.
Personal Guarantees: Being required to provide separate personal guarantees can expose you and your family to significant financial risk. If the transition doesn’t go as planned, you could be on the hook personally, which is a substantial burden.
Negotiation Approach: His insistence that “this is the agreement” does not foster a healthy negotiation environment. If he’s not willing to genuinely negotiate, this could indicate that he may not be acting in good faith. It could be helpful to document all your conversations and perhaps even seek third-party mediation.
Seek Professional Advice: Given the complexities here, it might be wise to consult with a business attorney or a financial advisor who specializes in buy-sell agreements. They can provide insights into norms in similar transactions and help you assess your position.
Alternatives: Consider whether there are other acquisition structures or financing options that could be more beneficial. Perhaps you could explore a phased buyout where you gradually increase your ownership while ensuring control of the company is gradually transferred to you.
In summary, it’s essential to evaluate the long-term implications of these agreements carefully. Your gut feeling that this isn’t a fair deal is something to take seriously, and ensuring you have an equitable agreement that positions you for success moving forward is crucial. Don’t hesitate to push back or involve professional advisors if you feel pressured into an agreement that doesn’t serve your interests.