Donald Sterling’s fall from power and the PR disaster surrounding his plunge will be the stuff of legend.
First, he was he voted the most hated man in America in a new poll by E-Score, beating out such villains as Bernie Madoff, O.J. Simpson, and even Justin Bieber.
Then, his estranged wife, Shelly, had him declared mentally incapacitated, using the ruling to seize control of the Clippers. Shelly Sterling then agreed to sell the Clippers to former Microsoft CEO Steve Ballmer for $2 billion. Moreover, she agreed that the Sterling trust would indemnify the NBA for lawsuits by Donald Sterling, kneecapping his suits against the league, since presumably the net effect of the indemnity is that the Sterling trust will pay any losses that the NBA suffers as a result of Donald Sterling’s lawsuit (think of it as Mr. Sterling now basically suing himself).
Admittedly, it is tough to feel sorry for Mr. Sterling, since he isn’t the most sympathetic character around and since the Clippers deal will be the second highest price ever paid for a sports franchise and about four times as high as any price previously paid for an NBA team (the previous high was the $550 million paid for the pathetic Milwaukee Bucks in May). The sale price is 160 times the $12.5 million price he paid for the San Diego Clippers in 1981. But, despite the dollars, imagine the ignominy of being declared mentally incapacitated to end a business dispute!
The only sports franchise transaction that resulted in a higher price than the Ballmer offer for the Clippers was the sale of the Los Angeles Dodgers to the Magic Johnson/Guggenheim Partners led consortium in 2012 for $2.15 billion. Notably, this transaction also arose out of an ownership dispute, in that case the divorce of Frank and Jamie McCourt.
While both the Clippers and Dodgers transactions arguably ended up superbly for their owners and resembled more of a combination of a circus and a daytime soap opera than a merger and acquisition transaction arising from the sale of a business, there are lessons to be learned from even the most comical cases to watch from the outside.
For middle market business owner fans (or haters) of the Clippers and Dodgers, the lesson to take away from these transactions is that if you have a business partner (domestic or otherwise), you should prepare for the worst. As the Sterlings and the McCourts found out, sometimes relationships go poorly. Businesses should be prepared for partnership divorces (whether literally divorces or not).
Hopefully, your partnership will go swimmingly, and you and your business partners will continue to be 100% aligned in your vision for the business. But, what happens if you have a dispute? Maybe one of you wants to sell the business and the rest of you don’t? Or, what happens if your partner dies, and he leaves his partnership interest to Shelly Sterling (or even just his Mrs. Sterling)?
The solution to these sorts of problems is in planning for these sorts of problems.
When middle market business owners think ahead about potential disputes, one common precaution for handling future, unknown problems is a document known as a buy-sell agreement, which can be entered into among all of the partners or shareholders in a business.
Typically, a buy-sell agreement addresses what happens to the business in the event of a dispute between owners, as well as how to handle the retirement, disability, or death of one of the owners. The provisions of the agreement don’t have to be invoked, but they can be in the event that your version of Donald Sterling gets Alzheimer’s or your version of Shelly Sterling disagrees with you as to whether to sell the business.
These agreements usually prescribe a process to handle the worst of disputes, forcing one or more of the partners to buy or sell his interests in the company (hence, the name of the agreement). They can also provide for a mechanism to price the company, and generally provide for a way to ensure the business’ continuity despite the death or disability of a partner or a terminal dispute among the owners.
Learn from the Clippers debacle. Plan for a possible downside in your own business partnership.
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