When You See a Shotgun Clause in a Buy-Sell Agreement
You’ve likely heard marriage and business compared to one another. However, we suspect this one may be a new one to you. Obviously, shotgun weddings invoke visions of weddings hurried by an authority figure. So, what about the shotgun clause in a buy-sell agreement? Are they alike at all?
To begin with, you should know that a shotgun clause isn’t really a legal term. It might even help to learn that in addition to shotgun clauses, there are also Texas shootouts. More than likely, you are now even further confused with this rhetoric.
Quite simply, both shotgun and shootout clauses are exit provisions in a buy-sell agreement. When used, the purpose is to allow shareholders or partners to transfer their part of the business to another company owner. Although this type of language is generally written when things are good, it is usually invoked when the business is in decline.
How Shotgun Clauses Work
Buy-Sell Agreement disputes can be challenging. Shotgun clauses literally push buttons. As in shotgun weddings, expediency is crucial. The idea is to make moves as quickly as possible. The exchange is initiated by the shareholder or partner who wants out of the business.
Before you even consider starting the process, you should consult with an experienced business lawyer. Emotions run high when it comes to ending any type of partnership or company. Your attorney may suggest negotiation as a first step. For the most part, shotgun clauses are not routinely used.
For the moment, let’s say that you want out of your business. You’ve done everything you can to make the company work. Frankly, you are exacerbated and ready to move on. After consulting with your attorney, you come up with a price to turn the business over to someone else who has a stake in it. As far as you’re concerned, you’ve offered a good deal.
The ball is now in the other member’s court. In an ideal world, your offer is accepted immediately at the specified price. However, that may be a dream. For one, if there are already business disputes, there’s a good chance you’ll be put on hold.
Notwithstanding, there are time restrictions. Furthermore, there are only two choices. One is that the other party agrees to your asking price and accepts your offer. The other? You are obligated to buy their share at the price you offered.
All things considered, a Texas shootout may sound like a better option. They are more common in two-person partnerships than any other type of business dissolutions.
How do they work? You start with your initial bid. Meanwhile, your partner will suggest a different price. Of course, the counteroffer will be higher than the one you initially offered. The process can go back and forth until a price is finally agreed upon. In some cases, you may even involve a third party so that the bids are sealed. The deal doesn’t close until a fair price is reached.