Thursday, August 18, 2005

I've taken a little bit of time to makes notes regarding the terms of our LLC Operating Agreement as they apply to a business partner leaving the company. All of the Class A partners are still going to meet with our attorney, but at least 90% of the Operating Agreement is easy to read, if not boring, so I worked through it myself.

LLC operating agreement details

Here's an overview of what the operating agreement says about a business partner that wants to leave:

  • Class A members have all management and voting rights; Class B members have no management or voting rights, just rights to distributions.
  • A 75% supermajority is required to authorize the Company to repurchase Membership Units. (Presumably a 75% vote among Class A members, not including myself, because I am the seller.)
  • There's a one year non-competition agreement that prohibits the selling member to talk to "existing or prospective" clients. This is for a one year period from the date he sells his interests.
  • There are some events that trigger termination of a member's interest, including retirement (is that me?), voluntary resignation (definitely me), breach, bankruptcy, divorce decree transfers, and death.
  • The section that details how a "terminating member's units" will be valued, and it gets a little dicey here:
    • Class A Membership Units Valuation Price = Fair Market Value
    • Class B Membership Units Valuation Price = Lesser of Net Book Value or Capital Account Balance (if purchased within 3 years of acquiring), or Fair Market Value (if purchased more than 3 years after acquiring)
    • In determining Market Value, the parties can either (a) Make a value determination internally, or (b) Each party (Company or Member as Buyer, and terminated Member as Seller) hires an independent appraiser to determine the value within 30 days, and if the appraisers cannot come to a mutual decision, you average the two numbers to come to a final value.
  • If the Company decides not to purchase a terminated Member's Units, and all the Class A Members (Jack, David) also decide not to purchase, the Class B Members (George, Cooper) have the right to purchase their pro rata shares.
  • With regard to terms of payment for the Units, if the Purchaser is another Member, the purchase price must be paid in full at Closing. If the Purchaser is the Company, 25% must be paid up front, with the remaining amount paid over 2 years with interest at prime +1%.
  • Upon the occurrence of a "triggering event" (presumably me wanting to leave), a terminated Member (me) has the right, for a 30 day period, to purchase any insurance policies owned by the Company or another Member on his life for the interpolated terminal reserve plus a proportionate part of the gross premium last paid before date of transfer.
  • No Member can sell his/her interest in the Company without first offering it to the Company and the remaining Members at the value stated above (Fair Market Value or Net Book Value). Upon receiving a written offer for purchase, the remaining Members have 30 days to decide whether they will purchase, or the Company will purchase, or neither. If they decide not to purchase, the Member can sell to a third party.

Summary: I'm a Class A Member, and the value of the shares of a Class A Member are "fair market price", which, to me, is pretty wide open. That being said, however this works out, I hope we can agree to a price without having to pay for two valuators. It seems obvious that Jack would try to get someone to say the company is worth $1, and I'd try to get someone who would say the value is infinite, or at least what our business broker (Marty) initially said, $3.6M.

As an aside, an interesting note is that the Class B Members shares aren't technically worth very much. From everything I've read, book value is essentially fire sale value, and we're a pretty thriving company right now. Jack and I got this agreement from a lawyer back in 1999, and I can assure you this is something we never gave much thought to.

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