Buy Out Agreement Negotiation and Drafting: General Information and
Instructions
Shannon and Caren, two sisters, own “Let’s Keep It Real, LLC,” (“Real, LLC) a
commercial real estate investment and sales company. Shannon and Caren started
this business 15 years ago and have built it into a very successful enterprise.
Shannon focuses more on the sales aspect of the company—attracting buyers for
their properties, clients for new listings, etc. Caren is more heavily involved on the
land acquisition and redevelopment side. She has been very successful at
identifying emerging commercial spaces in Atlanta, investing in those properties,
and redeveloping blocks of commercial space for resale or leasing, which Shannon
handles.
Shannon owns 45 percent of Real, LLC (450 Units) and shares all management
power with her sister. Shannon is married and has a 22-year-old daughter, Skyee,
who is built in her mold—she is outgoing, gregarious and a natural sales woman.
Skyee has been working with Real, LLC since her junior year at GSU as a part of the
sales and client development teams. She grew up with the business and has a strong
interest in building her career at Real, LLC.
Caren owns 45 percent of Real, LLC (450 Units) and shares all management power
with her sister. Caren got the idea to start this company after her first husband died
of a sudden heart attack. She acquired a warehouse in Kirkwood as a part of his
estate. She held onto it for several years and was able to sell the building as a part of
a downtown redevelopment that was very profitable. That was 15 years ago and
Real’s first transaction. Caren has no children, but recently became engaged to her
long-time boyfriend, Jeff, who also works in commercial real estate with his own
company.
Real LLC has 1 other key employee, Ronny, who has been with the company for 10
years. Ronny holds a 10 percent ownership interest Real, LLC (100 Units) and is
responsible for all operations, administration, and back-office support.
Shannon, Caren, and Ronny have decided that they need a members’ buy-sell
agreement. Ronny, not having the same resources as the sisters, has agreed to take
whatever proposal they come up with to his lawyer for review and editing prior to
final signatures. Basically his position is that the sisters should work out their terms
and make him a reasonable offer.
You are tasked with the following:
1. Identify all triggers that need to be addressed in this buy out agreement
2. Pick 2 triggers to address in further negotiation. For each of the 2 triggers,
state the
a. Valuation methods applicable. You MUST use at least 2 different
valuation models
b. Transfer/purchase restrictions/obligations.
c. Any other applicable conditions such as RFR, tiered purchase options,
installment options, etc.)
d. You MUST vary the rights as between the members with respect to at
least one trigger.
e. You MUST address as least 2 “other conditions” for each trigger
(something from (b) and/or (c)).
3. Please identify the rights of Shannon, Caren and Ronny for each negotiated
trigger scenario (note you will need to walk through the events assuming
that each member triggers so you will be discussing a total of 6 fact
patterns—three for each of the two triggers).
4. Please explain 3 funding sources or strategies contemplated in your buy out
agreement.
To assist in your negotiations, attached please find a set of rough financials for
Real LLC, including a recent balance sheet and a listing of the last 5 years worth
of net profits.
Attached please find a sample buyout agreement. For this assignment you are
not expected to complete a full agreement, rather you are required to negotiate
and draft the trigger/valuation provisions subject to the guidelines stated above.
The sample agreement is for your records and to serve as a reference and source
of inspiration for the portions of the final agreement that you will be drafting in
this assignment.
Each team will turn in 1 complete assignment, which is due on November 9,
2010. Each attorney on the team will receive the same grade.
5. Let’s Keep It Real LLC Financials
ASSETS
Cash
LIABILITIES
Total Liabilities
$500,000
Real Property
(acquisition price)
Kirkwood Station
1,500,000
Oakhurst Commons
895,000
City View Mixed Use
3,500,000
Arizona St. Warehouse
955,000
50,000
Office Equipment
100,000
NET PROFITS
2005
2006
2007
2008
2009
PROJECTED 2010
$7,550,000 M
$1,100,000
$2,800,000
$1,900,000
$ 400,000
$ 875,000
$2,300,000
450 Units
APPROX.
$2,047,500
Caren Capital Account
450 Units
APPROX.
$2,047,500
Ronny Capital Account
Company Vehicles (2)
Total Assets
EQUITY
Shannon Capital Account
Personal Property
3,000,000
100 Units
APPROX.
$455,000
Total Equity
$4,550,000
Total Liabilities and Member
Equity
$7,550,000 M
SAMPLE
Georgia Buy-Sell Agreement
NOTE: You are NOT required to complete this agreement for the assignment. See specific
negotiation and drafting instructions above
Agreement executed ________[date] between ________, of ________[address] ________, of
________[address], and ________, of ________[address], called the "members," and ________, a
Georgia limited liability company with offices at ________[address], called the "the company."
Recitals
A. ________, ________, and ________[names of parties] are the sole members of the company,
owning respectively ________, ________, and ________ units. The term "units" shall mean all units
representing an ownership interest in the company, $________ par value, of the company now owned or
subsequently acquired in any manner by the parties.
B. The members are ________[to be] actively engaged in the conduct of the business of the company,
and ________[it is contemplated that] success or failure of the enterprise will at all times depend in large
measure on the personal abilities of the members.
C. There is not now, nor is there likely in the future to be a substantial market for the units of the
company.
D. For the foregoing reasons, the parties desire to provide for the purchase by the company or the
remaining parties of the interest of any party desiring to sell the same, and for the purchase by the company
or the surviving parties of the units of a deceased party.
In consideration of the mutual covenants set forth, the parties agree as follows:
Section 1. Unit Transfer Restricted
No member shall transfer, pledge, assign, or encumber all or any part of his or her stock holdings in the
company except as provided in this agreement.
Section 2. Legend on Units
The secretary of the company shall endorse the following legend on each share certificate prior to its
delivery to a member:
"The units of stock evidenced by this certificate may not be transferred, pledged, assigned, or
encumbered except in accordance with the terms of a buy-sell agreement dated ________, a copy of which
is on deposit with ________[the president of the company]."
Section 3. Inter Vivos Repurchase
In the event any member desires to sell, transfer, or otherwise dispose of all or any part of his or her
units in the company, he or she shall deliver written notice of such desire to the company and to each
member, specifying the number of units he or she desires to dispose of. On receipt of such notice, the
company ________[may or shall to the extent it is permitted to do so by the Georgia Business Company
Code or any successor statute] buy, and the member shall sell to the company the number of units set forth
in the notice at the place and on the terms set forth in Paragraphs 6 and 7 below.
Section 4. Repurchase on Death of Member
On the death of any member, the company shall, if not prohibited by the Georgia Business Company
Code or any successor statute from doing so, buy, and the executor, administrator, or personal
representative of the member will sell to the company, all of the units owned by the member at the time of
his or her death at the price and on the terms set forth in Paragraph 6 below.
Section 5. Members' Option
If the company is prohibited by the Georgia Business Company Code or any successor statute from
buying any of the units offered for sale to it, ________[or if the company elects not to buy any of the units
offered for sale to it], then each of the other members shall have the option to buy, and the offering member
shall be obligated to sell to each, a proportion of such units equal to the ratio of the number of units owned
by such member to the total units owned by the remaining members excluding the seller, and if a member
is unable or unwilling to buy the proportion of stock allotted to him or her, the other members shall have
the right to buy the balance in a similar ratio. The purchase price for such units and the terms of sale shall
be as set forth in Section 6 below.
Section 6. Price and Terms of Sale
The purchase price shall be ________[the net book value per share multiplied by the number of units
to be purchased] such value to be determined in the case of inter vivos transfers on the date of delivery to
the company of the notice specified in Section 3 above, and in the case of transfers occasioned by the death
of a member, on the date of death. The term net book value per unit shall mean the aggregate book value of
the units of the company divided by the number of units then issued and outstanding. The term "aggregate
book value of the units" shall mean the excess of the cost of all of the assets of the company over the sum
of (a) reserves for depreciation maintained on the books of the company; (b) treasury stock, if any; (c) all
determinable liabilities; and (d) the amount of any dividends paid or payable to members of record on a
date prior to the valuation date but not reflected in the books of the company as of the valuation date.
In the event of any disagreement among the parties, their executors, administrators, personal
representatives, or any of them with respect to the determination of the book value of any of the units to be
purchased, book value shall be computed in accordance with this section by an independent certified public
accountant selected by the company, and this computation shall be final and binding on the company and
each of the members and their executors, administrators, and personal representatives. The cost of such
accounting shall be born equally by the parties unable to reach agreement.
It is understood that the purchase price, determined as set forth above, shall be the value of the
purchased units for all tax purposes. In the event such value is later increased by any federal or state taxing
authority, any tax liability resulting from such increase shall be borne by ________[the selling member or
his or her executor, administrator, or personal representative, as the case may be].
The purchase price shall be payable at the option of the company or purchasing member either in a
lump sum within ________ days following the valuation date as set forth above, or in ________ equal
monthly installments of principal beginning ________ days after the valuation date, with interest on the
unpaid balance at the rate of ________ percent per annum, such interest to be payable with the final
installment of principal. Any party electing to pay in installments shall have the right at any time to prepay
without penalty all or any portion of the unpaid principal balance plus interest accrued to the date of
payment.
Section 7. Delivery of Certificates
Certificates for all units sold, properly endorsed to the company or purchasing member, as the case
may be, shall be delivered to the purchasing party by the seller not later than the date of the lump sum
purchase price payment or first installment payment, whichever first occurs. Thereafter, the selling
member, or his or her estate, shall cease to be a member of the company with respect to such units.
Section 8. Company To Maintain Insurance
To insure or partially insure its obligation under this agreement to purchase from the estate of a
deceased member the units owned by such member prior to his or her death, the company has purchased,
and shall continue in force by timely payment of premiums, the policies of insurance covering the lives of
each of the members summarized in Exhibit A, which is attached and incorporated by this reference. In the
event any member ceases to be a member of the company or reduces his or her holdings of the units of the
company, by voluntary transfer or otherwise, the company shall, as appropriate, terminate or procure a
proportionate reduction in the face amount of insurance outstanding on the life of such member, and in the
event any member increases his or her holdings of the units of the company, the company shall procure and
maintain additional insurance on the life of such member proportionate to the increase in the holdings of
such member.
Section 9. Obligation of Company as to Transfer of Units
In no event shall the company sell, transfer, or otherwise dispose of any of the units of the company,
including any units repurchased by it pursuant to this agreement, to any person or entity until such person
or entity has become a party to this agreement and is bound by its provisions.
Section 10. Amendments; Waiver of Agreement
This agreement may be amended or altered by execution of a written agreement duly authorized by
corporate resolution and signed by all the parties to it, and any of the units subject to this agreement may be
disposed of by any member to the company or to any other person without regard to the terms of this
agreement on the written consent of a majority of the company's board of directors and each of the
members.
Section 11. Notices
Any notice required to be given pursuant to this agreement shall be sent, and shall be considered to
have been delivered on the date when sent by prepaid United States registered or certified mail, return
receipt requested, properly addressed to the party to receive it, as follows: Notices to be sent to the
company shall be addressed to it at ________[address], attention of the president: notices to be sent to the
members shall be sent to them at their addresses as shown on the company's stock records unless a different
address has been designated in writing.
Section 12. Binding Effect
This agreement shall bind, and unless inconsistent with its provisions, shall inure to the benefit of the
executor, administrator, or personal representative, and the heirs and assigns of each of the members.
Section 13. Applicable Law
This agreement is executed and is to be performed in Georgia, and shall be governed by and construed
in accordance with the laws of the State of Georgia.
Executed at ________ on the date first written above.
[Signatures and titles as appropriate]
[Corporate seal]
Attest: ________.
[Attach exhibit]
Incomplete list of ALTERNATIVE VALUATION MODELS
1. 13:398. Buy-sell agreement—Provision—Valuation of units by capitalized earnings formula
The purchase price to be paid for each of the units shall be the average adjusted net profit per unit, as
defined below, multiplied by ________[eight]. The average adjusted net profit per share shall be calculated
as follows: The net profits of the company for each of the ________[five] full fiscal years preceding the
date of valuation shall be adjusted by deducting from the company’s profits:
(1) All ordinary state and federal income taxes, specifically excluding taxes on unreasonable
accumulations, personal holding company taxes, and other similar taxes;
(2) Amounts required to amortize and pay any long term debt then outstanding;
(3) Amounts of any nonrecurring capital gains; and
(4) By adding to the net profits the amount of any nonrecurring capital losses to the extent not
compensated for by insurance.
The net profit figures for each of the ________[three or five] years, thus adjusted, shall be added and the
total shall be divided by ________[three of five]. The average adjusted net profit figure, thus obtained,
shall be divided by the number of units then outstanding to arrive at the average adjusted net profit per unit.
2. § 13:399. Buy-sell agreement—Provision—Valuation of shares by appraisal at time of purchase
The purchase price for each of the units shall be determined by appraisal. Within ________ days after
the occurrence of the event authorizing or requiring purchase, the company shall cause
________[appraiser] to appraise the company and determine its value. The expense of appraisal shall be
borne by the company. In making an appraisal, the appraiser shall observe the following guidelines:
(a) Real estate and improvements shall be valued at fair market value.
(b) Machinery and equipment shall be valued at the lower of replacement cost or fair market value.
© Finished goods shall be valued at cost or market value, whichever is lower.
(d) Work in process shall be valued at cost, determined according to the cost accounting procedures
ordinarily employed by the corporation in preparing its financial statements.
(e) Accounts receivable shall be valued at face value, less an allowance for bad debts that is reasonable
in view of the past experience of the corporation and a review of the collectability of particular accounts.
(f) Liabilities shall be deducted at face value, and a reserve for contingent liabilities shall be
established, if appropriate.
(g) An appropriate allowance shall be made for goodwill, in light of the earnings history and potential
earnings of the corporation.
(h) The value of other comparable business enterprises shall be considered, if known.
3. § 13:400. Buy-sell agreement—Provision—Determination of purchase price on redemption by
company
The purchase price of the units shall be the annually fixed purchase price, if applicable, or the greater
of the adjusted book value, or the last agreed on valuation.
1. Annually Fixed Purchase Price. Within ________ days after the end of each fiscal or calendar year
of the company, and in no event later than ________ days after receipt by the president of the company of
the year-end audit report of the company for each fiscal or calendar year, all of the members shall endeavor
to agree on the purchase price to be paid for the units owned by each member. The agreed price shall be
reduced to a memorandum signed by all the members in the company and attached to and made a part of
this agreement. The purchase price as determined in this paragraph is called the annually fixed purchased
price. The annually fixed purchase price shall be controlling only if it has been agreed to by the members
not more than ________ days prior to the death of a member of the date on which he or she gives notice of
his or her desire to sell his or her units, whichever shall be the occasion for the purchase.
2. Adjusted Book Value. The adjusted book value of the units of units shall be computed as follows:
(a) Book value of the units of units of the company shall be determined as at the end of the month in
which the member dies or the date on which he or she gives notice of desire to sell, whichever event shall
be the occasion for the purchase, provided however, if the notice of election to sell is given or the death of a
member occurs less than ________ days prior to the end of a month, then the book value shall be
determined as at the end of the month immediately following the month in which the member dies or in
which the member gives notice of his or her election to sell. The book value of the units shall be adjusted as
determined in this agreement.
(b) An appraisal of the current market value shall be made in the manner set forth below of the tangible
personal property and any real estate which may be owned by the company. The excess of such an
appraisal value over the value of such real and personal property shall be added to the book value computed
in accordance with the preceding subparagraph (a), and the result shall be the adjusted book value.
(c) The adjusted book value shall be divided by the total number of the outstanding capital units of the
company, and the result shall be deemed the per unit adjusted book value.
(d) The value of each unit determined in accordance with the preceding subparagraph © above shall be
multiplied by the number of units owned by the selling member or his or her personal representative, as the
case may be, and the amount so determined shall be the purchase price for units purchase pursuant to this
agreement.
3. Appraisal of Tangible Property and Real Estate. The appraisal of the tangible personal property and
real estate of the business provided for in subparagraph (b) of the preceding paragraph shall be
accomplished in the following manner:
(a) The company and the selling member or his or her personal representative shall each appoint one
appraiser.
(b) The appraisal shall be made within ________ days after the appointment of the appraisers. In the
event that such appraisers are unable to agree on the appraisal value, then they shall appoint a third
appraiser and the agreement of any two of the three appraisers shall be binding upon all parties.
4. Determination of Net Profits and Book Value. The terms “net profits” and “book value” as used in
this agreement shall be determined by the independent certified public accountants regularly employed by
the company, and in the absence of fraud or manifest error, the determination so made and duly certified by
the accountants shall be conclusive and binding on all parties. The determination shall be made by
reference to the regular books of accounts and records of the company kept in accordance with generally
accepted accounting practices. In determining book value, no allowance shall be made for goodwill, or for
the proceeds of any policy of insurance on the life of a member, if any, received or receivable by reason of
the death of a member but the cash surrender value of all life insurance policies on the lives of the member
determined as at the date preceding the date of notice of his or her election to sell units or the date of death
of a member, as the case may be, shall be included in making this determination. Net profits of the
company shall be determined after deducting all taxes and by excluding extraordinary income not derived
from regular operations of the business, including but not limited to, gains and losses from sale or
involuntary conversion of business assets and proceeds of life insurance.
If the company does not regularly employ an independent certified public accountant, then the personal
representative or other non selling members, as the case may be, shall mutually agree upon an independent
certified public accountant to make the required computations.
5. Payment of Purchase Price. In the event of the purchase of such units by the company or nonselling
members, the payment for such units shall be made in cash at the time of closing, but in the event that the
total purchase price exceeds the sum of $________, then the company or the nonselling members may elect
to pay the purchase price by payment of a down payment of ________ percent and the remainder in equal,
annual installments, not to exceed ________ installments, which installments shall be evidenced by a
promissory note bearing interest at the rate of ________ percent per annum on the unpaid balance.
CLIENT CONFIDENTIAL: You represent Shannon
In addition to your general knowledge of Real, LLC, Shannon has divulged the
following additional information:
 Shannon and Caren generally have a great working relationship and are very
compatible business partners, especially since each has her own area of
primary expertise. Shannon is given leeway to run the sales side and she
respects Caren’s judgment with respect to the acquisition and development
side.
 Shannon is a little uneasy about Caren’s fiancé Jeff. He seems to be a bit
controlling of her sister. And Shannon is just uncomfortable with the idea of
her sister marrying someone who runs a rival commercial firm. Shannon
went into business with her sister, NOT her sister and Jeff. She wants to be
sure that he cannot receive an interest in Real, LLC.
 Shannon has received equity partner offers at other commercial real estate
firms to come join them. Shannon has never really considered the
opportunity before, but may be interested if things ever changed, or if there
wasn’t enough room for her to develop both her AND Skyee’s listings.
 Shannon wants Skyee to learn the business and become a partner one day.
She sees her taking over and running the show eventually.
 Shannon has had some financial troubles in the past. She filed for
bankruptcy in her late twenties. She is in some financial trouble again having
over-extended herself during a recession that hit real estate particularly
hard. Now that Skyee is out of school, she hopes that she can start saving to
pay down her debt. She is worried about not having much cash available to
fund a buyout of her sister or Ronny if it ever came to that.
 Shannon is in a very stable relationship with her husband, Mark, of 26 years.
Mark is an architect.
 Shannon and Ronny have a great relationship. He ran the office at her
marketing job before she joined Real, LLC 15 years ago. They are best friends
and she really respects his work in the company. She wants to make sure
that he is treated fairly and gets to stay in the business no matter what—they
made him a partner after all!
 Shannon sees the sales side of the business as what drives annual profits.
Sure Caren identifies properties and after a huge investment of time
(sometime years) and money, they make a significant profit, but they can go
years in between the completion of one project or another. Shannon sees the
company as being kept afloat by its sales side, and earning bonuses every
couple of years when the developed property sells. Shannon, however, does
not appreciate that her ability to attract buyers is due in part to their
reputation of being involved in the hottest development projects in town
which makes it easier to sell their listed properties and easier to attract
listings because people want associated with the Real, LLC name--something that Caren’s work has really developed.
CLIENT CONFIDENTIAL: You Represent Caren.
In addition to your general knowledge of Real, LLC, Caren has divulged the following
additional information:
 Caren and Shannon generally have a great working relationship and are very
compatible business partners, especially since each has her own area of
primary expertise. Caren is given leeway to run the acquisition and
development side and she respects Shannon’s judgment with respect to the
sales side of the business.
 Caren is very excited about her upcoming marriage to Jeff. She wants to be
sure to provide for Jeff in the event of her death the way that her first
husband provided for her.
 Caren loves Skyee as a niece and sees tremendous potential in her. Caren is
reluctant, however, to hand the keys to the business over to someone so
young and inexperienced. She would not be comfortable trusting Skyee to
take over Shannon’s interest right now, but does want to keep it a family
business. She is very conflicted on this issue and wants to avoid creating
tension with Shannon, who believes that Skyee hung the moon.
 Caren sees her position in the company as truly unique- no one else there
could or wants to do what she does. She does not think that the business
could survive without her. In that same vein, Caren doesn’t value the sales
side of the business as an equal driver in the business. She thinks that she
could list her properties with another agency only losing the sales
commission of listing outside—but that expense would come without the
expenses of sharing profits with the sales team and needing all of the
personnel support. Caren thinks that listing their properties outside of Real,
LLC would basically be a wash. In her view, if it isn’t family doing the sales,
she isn’t interested in engaging in what is in her opinion, a break even (or
possibly worse) side of the business. She can do what she loves by herself.
Caren, however, is discounting the volume of business that Shannon does in
listing commercial properties owned by third parties and that their presence
in the Atlanta market even when they don’t have a development ready
facilitates identifying both buyers as well as future property sites.
 Caren is a property person so she understands that the real value of the
company is in the real estate assets held by it—and their ability to appreciate
in value. Any valuation formula must take into account or predict on some
level the value of the land held by the company before it is sold.
 Caren has a somewhat troubled relationship with Ronny. She isn’t sure why
he and Shannon are so close and sometimes feels excluded from and perhaps
even a little jealous of their relationship. Years after Ronny was hired, she
learned from a close friend the circumstances under which Ronny was fired
from the marketing firm where he worked with Shannon. The story is not
favorable and suggests that Ronny was skimming profits from the company.
Ever since then she has had a hard time trusting Ronny with significant
responsibility, although she has to admit that he does a good job running the

back office for the company and has never found any evidence of impropriety
at Real, LLC.
Caren is worried about Shannon’s finances. Shannon just bought a new
house, drives a very fancy car and always appears in the latest and greatest
fashions—even during the steep economic slump with sales were very low.
Caren knows that Shannon filed for bankruptcy in her early 20’s, and is
hopeful that she has learned her lesson, but Caren has her doubts.