Mexican Shoot-out Clause - So you don't have to shoot your Business Partner

The little clause that could save your financial life

Having a business partner can radically speed-up the road to success, make it a less lonely endeavor, but ultimately for many, end up being the ruin not just of a friendship but of years of invested effort.

A lot of these negatives can be effectively managed by a little forward planning. The biggest problem is that very few new business partners anticipate that they might need to think about these eventualities properly

Percentage of couples on their wedding day that think their marriage will end in divorce: 0%; Actual percentage of couples that divorce: 55%;
(Ok thats just a joke)

Why Business Partnerships fall apart

I've seen best friends of 10 years rapidly build up a highly successful business, and how suddenly people change - totally unexpectedly - as soon as the first "real money" is on the table. So apart from the obvious "greed" factor, there could be ego issues; uncertainty about who is supposed to be the ultimate decision maker (when the idea was originally for joint decision making); disagreement about major directions or business decisions; stress while going through hard patches; Anger if one partner makes a serious mistake; The perception that one partner is slacking off, or that one's contribution is more valuable to the business than the other's....

In the end it doesn't even matter why business partners fall out of bed, or even if your partnership will land in trouble - because the solution - if you KNOW ABOUT IT, and implement it UP FRONT, is really cheap, and you'd much better have it and not need it, than need it and not have it.

The Mexican Shoot-out Clause

One of THE BEST solutions to 50/50 partnership conflicts, is the inclusion of a mexican shoot-out or mexican stand-off type clause in the shareholder's agreement.

Basic mechanics of The Mexican Shoot-out Clause

The idea is that should an unrecoverable breakdown in relations occur, or should the partners find their visions of the future becoming incompatible, a dispute is then formally declared.

Each partner will then write a figure (confidentially) on a piece of paper and seal it into an envelope labeled "Offer to purchase shareholding of partner X".

Both partners will then hand their envelopes over to an impartial lawyer who will open the two envelopes in their presence.

The partner who wrote down the highest offer, automatically becomes the buyer of the other partner's shares for that amount.

Caveats

It's important to set all other performance criteria up front, such as how long the winning bidder has to raise the finance, and what will happen if the winning bidder is unable to raise the amount.

One suggestion is that should a partner make an offer and not be able to come up with the cash within the stipulated time-frame, he will be liable for a penalty amount of 10% of his bid, and the other partner will now have the OPTION to excercise his right to buy at his offered amount, and utilitise this penalty amount towards it. (The time-frame to raise the finance will now be extended for the 2nd partner's offer)

This encourages partners to make the highest possible offer they can afford, but not make offers that they cannot realistically back.

Although the Mexican Shoot-out is one of the fairest way to settle irrevocable schisms, it does place the partner without access to funding sources at a slight disadvantage.

3 Or more Partners and other variations

One solution to break potential dead-locks and to increase the chances that reason will prevail, is to structure a business with 3 equal partners (33.3) rather than as two 50/50 partners.

However this doesn't really solve all problems, since polarisation can still happen, ending with two partners "ganging-up" on the third.

Similarly larger even numbers can also cause deadlocks e.g. 4 or 8 partners, although as the number of partners increase, it becomes less likely.

Other Resources - further reading

What if it\'s a 50 50 split between two companies (already in a partnership), and one of them is larger than the
other...the smaller will not amend for the Mexican Shoot Out clause.  What then?