Today over at Brent Ozar Unlimited, we announced that the company is buying out Jeremiah and Kendra’s shares. What exactly does that mean, and what kind of work is involved?
Fifty Ways to Leave Your LLC
Decide who’s getting out, and when. We had an oddball situation: we shared the same vision for the company, we’d found good product/market fit, and any of us could have been successful executing on the vision. The company just didn’t need three partners at the top to do it, and the business had just accumulated enough value that it made sense for one or more of the partners to take money off the table and bow out. (There’s a tremendous amount of voluntary unpaid work involved in starting a company, and it’s nice to be able to get paid for that at some point.)
Decide what they’re taking with ’em. We built a lot of protection in the company’s operating agreement. The cofounders got a permanent, royalty-free license to any intellectual property they’d created while with the company. For example, Jeremiah could have kept the sp_BlitzCache® code, and Kendra could have kept sp_BlitzIndex®. This would have made it easier for an exiting cofounder to keep making a living doing something else – but it also reduced the value of the remaining company. In order to maximize the company’s worth (and therefore, the buyout price), Jeremiah & Kendra elected to let go of that license.
Decide what they’re not allowed to do after leaving. In an acquisition, it’s not uncommon for the bought-out parties to be prohibited from competing in the same industry, or pursuing the company’s clients, or hiring the company’s staff. All of that is negotiable, including timelines. (For example, with our agreement, Jeremiah & Kendra are allowed to go to work anywhere.)
Figuring Out the Value of the Company
Review what the company needs to succeed. In the next 12-24 months, does the company need a big cash injection? Does it need the resources of a specific kind of partner, like a software development shop or a large sales force? What additional resources would suddenly make the company more valuable? We looked at our partners, competitors, and clients, thinking about who could find the most value in us.
Decide how much of the company will be sold. We could have sold the entire company, a majority of it (since Jeremiah & Kendra owned 2/3 of it), or a minority of it. We could have sold for cash, merged, or had a stock swap with another company.
Guesstimate what the company’s worth. The above stuff all affects the company’s worth. Look at the assets and liabilities that the company has, how much revenue it’s bringing in, and its profitability. If it’s going to be acquired, consider what these assets will be worth to the newly formed/merged company. (Ideally, have a qualified valuation professional do this big review.)
We thought about a lot of different options and their payoffs during this exercise. We learned a lot about our business, our industry, and other businesses. After doing the homework, we believed even more in our vision of what we wanted to do with the company over the next 2-4 years. (This is why you’re not going to see a lot of changes in the way Brent Ozar Unlimited® works – it wasn’t like we had passionate disagreements about where the company was going or what it stood for.)
We came up with numbers and a payoff plan, and we breathed a sigh of relief because we thought the hard work was over. Nope!
The Legal Stuff
Get attorneys involved. In our case, the business was going to buy out Jeremiah & Kendra’s shares, which meant that for the first time, the business was going to assume debt. The company’s attorney (the super-awesome and highly-recommended Tom Cox of McCarthy Duffy LLP) wrote up the debt paperwork and drafted a set of changes to our operating agreement. However, that’s only one side – Jeremiah & Kendra had to get their own attorneys to represent their own interests.
Let the attorneys build a set of discussion points. Jeremiah & Kendra’s attorneys came up with a set of changes to the company’s paperwork. For example, if the company defaults on the loan, Jeremiah & Kendra come back into the business – but at what ownership share, and how does the company’s operating agreement look then?
The partners have the discussions. When Jeremiah, Kendra, and I talk, nobody’s getting billed by the hour. When the attorneys argue with each other, we’re lighting hundred dollar bills on fire, as Kendra says. We talked through the objections from each side, figured out what risks we wanted to mitigate, and which risks we were comfortable living with. Then we explained what we wanted to the attorneys, and they ironed out the details.
As I write this, the paperwork’s all inked, the champagne has been consumed, and the announcements are scheduled.
And the pressure is on.
See, now it feels like Jeremiah and Kendra are Mom & Dad. (Well, not in that order.) They’ve given me a set of responsibilities and a mission. They’ve trusted me with the company, and I don’t want to let them down. They’ve worked so hard to get the company to where it is today. I owe them success.
And I’m really, really excited! Let’s see what happens next.