Buy-sell agreements are arrangements between the owners of businesses that call for the other owners (or the business itself) to purchase the interests of a particular owner if certain events, called trigger events, occur. Buy-sell agreements with private businesses are normally private arrangements, but sometimes, they become public. The Memphis Grizzlies basketball team and its owners are in the middle of such a triggering event that is making news at present.
The Athletic reported recently:
A buy-sell provision in the ownership agreement between [Robert] Pera and minority owners Steve Kaplan and Daniel Straus was exercised last week, sources told The Athletic. Both minority owners had the right to invoke the clause starting in late October, which allows one or both of them to set a new valuation for the franchise that sold for $377 million in 2012.
The agreement was entered into back in 2012, with a trigger window of 60 days at five years (2017) and thereafter, at three year intervals. The Grizzlies’ buy-sell agreement is called a “shotgun agreement.” Under a shotgun, at a trigger event, one party gets the opportunity to name a price and the other party gets the opportunity to buy or to sell at that price.
How Might the Shotgun Agreement Work – An Example
Forbes has recently “valued” the Grizzlies at nearly $800 million, so there has been considerable appreciation in the team’s value since the purchase from Michael Heisley in 2012. Kaplan owns 25% of the Grizzlies, and Straus owns 14%. While I have not seen the agreement, reports indicate that the minority owners have the right to set the price. So, for example, if Straus set the price at $1.0 billion (used to simplify the math in this example), Pera would have the choice of either buying Straus’s 25% interest for $250 million, or selling his interest at a pro rata percentage of $1.0 billion.
If we assume that Pera owns 51%, his purchase of the Straus interest would give him a 76% interest, and clear control. However, the purchase price for the additional 25% would be greater than the $192 million purchase price (51% x $377 million) he paid for 51%. On the other hand, Straus would receive $250 million relative to the $94 million he paid for his 25% interest.
If Pera were to decide to sell, Straus would have to come up with $510 million to acquire the 51% Pera interest, which would leave Pera with a substantial gain over his $192 million investment.
For simplicity, I’ve not made calculations regarding the 14% interest held by Straus, but the numbers would work similarly. Kaplan and Straus could work together, but then, they would still have to decide who would be in control.
Shotgun buy-sell agreements like that of the Grizzlies are games for the rich. It costs a lot to be in the game, and it costs more, often many multiples of the original investment, if a shotgun agreement is triggered.
What will happen? I don’t know nor do I know any real dollar figures for this transaction. But either Kaplan, Strauss, and Pera will reconcile or Pera will make Kaplan and Strauss richer, or Pera will realize a substantial gain on his investment and the Grizzlies will have a new controlling owner (or group).
If more information becomes available on the Grizzlies buy-sell agreement, or if there is more news about its economics, we will write about it on this blog.
Until then, Go Grizz!
Valuation is important for business owners for many reasons. One of these reasons is for the operation of buy-sell agreements. If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.
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