Joint venture exit strategies


A group of us are forming a Joint venture to buy a park. What is a common approach to write in the operating agreement for buyout provisions if someone wants to exit early. More specifically, how do you fairly value the asset at the time of exit? Thanks! Dave

There are a few ways to do it - the most common one is the ‘baseball method.’ The owners who want to stay in the deal get an appraisal, the owner wanting to sell gets an appraisal. If the values are within 5% (you choose the amount) you take the midpoint. If the appraisal comes back with a delta higher than 5%, you get a third appraisal. Than you take the average value of the three appraisals. This is your buyout price. And the owner getting bought out is paid based on this valuation.

This is excellent, thank you very much!!

Depending on if the partners are all operators or not, you may have provision for premature quitting, retirement, death, nefarious activity, loss of license, etc. For example, in another business in which I am involved, if I lose a professional license due to illegal activity, I only get 50% of my value. If death or incapacitation happens, there is another value assigned. If you agree that it is a 10 year deal, but somebody wants to leave after 1 year, there is another value. This is because depending on the circumstances of the exit, it could force the remaining partners into situations (e.g. coming up with cash) that may not be easy. A good attorney would help guide you. You may also want to consider cross-purchase life insurance to help the buyout if somebody dies.

Thats awesome, I totally agree! Really helpful! We were thinking about that, trying to make it not so easy to go in and out etc. Thanks again!!

I own 2 apartment complexes in a Joint Venture with 2 other partners. I highly recommend getting an attorney who specializes in doing operating agreements. We used Merrill Kaliser and Greg Ehrlich from Kaliser and Associate. They are in Dallas, but helped us with our property in Iowa as well. They have seen lots of deals gone awry, so best to use a specialist.

That said, your lender may also have a say in how your company agreement is structured. One of our lenders was very picky about the wording and another not so picky. Hence the reason it is best to get a skilled, experienced attorney.