Selling Your Minority Interest: Owner / Employee

[Originally published May 9, 2011 at California Corporate Lawyer]

Selling a minority interest in a privately held business in California
must be handled thoughtfully. First, if you are able to sell a minoroty
interest in a privately held business for a profit (whether small or
substantial) you are already on a good path. This article address some
consideration for an individual minority owner who is also an employee.

The
good news is that you are getting paid for your hard work and getting a
return on your investment. These are the rewards that capitalism
provides. The bad news is that your Company may try to limit your
ability to own and operate a similar business for a period of years or
within a specific geographic region through a non-compete agreement.

You
may say, "Wait, I read
http://alglaborlaw.blogspot.com/2008/08/non-competition-clauses-in-california.html,
which says non-compete agreements are void in California." They are
….for pure employees. However, there are narrow exceptions under
16601, 16602 and 16602.5 which provide that a seller of "substantially
all" of his/her/its assets, goodwill or interest in a business "may
agree with the buyer to refrain from carrying on a similar business
within a specified geographic area in which the business so sold, or
that of the business entity, division, or subsidiary has been carried
on, so long as the buyer, or any person deriving title to the goodwill
or ownership interest from the buyer, carries on a like business
therein."

Here, there are elements of both the employee
relationship and the owner relationship. Despite being an "owner" many
"owner-employees" are not financially independent such that they can
afford to not work for an extended period of time, even with a
substantial payout from the sale of their shares — taxes, mortgages,
school tuition and debt incurred during the formation and growth of the
business all add up quickly. Therefore, the owner-employee must tread
carefully so as to not restrict his or her future ability to earn a
living or maintain his or her lifestyle when agreeing to sell his or her
shares.

On the one hand the owner-employee is often not required
to agree to any and every restriction, on the other hand the employer
is often not required to repurchase the shares. The "may"
language will naturally result in a negotiation of the future
restrictions on the activity of the owner-employee, which will often
become a material business point affecting the pruchase price paid for
to the owner-employee for the shares or whether the sale will even be consummated at all.

Adishian
Law Group, P.C. assists owners of privately held companies in the
negotiation and sale of their shares or membership interests to maximize
the value of their ownership interest while allowing them reasonable
freedom to pursue their next entrepreneurial dream or investment. If you
are contemplating the sale of your interest in a corporation, limited
liability company or partnership, we recommend that you consult and
attorney before concluding the purchase and sale agreements.

Note:
The information contained is not legal advice and does not establish an
attorney-client relationship. Our contact information is included and
we always offer a free consultation. For more information about SELLING
THE COMPANY, SELLING SHARES, SELLING MEMBERSHIP INTERESTS, SELLING
PARTNERSHIP INTERESTS, LIMITED LIABILITY COMPANIES, CORPORATE LAW and
other areas of law, please visit http://www.AdishianLaw.com, contact us
via email to askalg@adishianlaw.com or call us at 415.955.0888 or
310.726.0888. Copyright Adishian Law Group, P.C. 2011.

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Christopher M. Adishian, Esq.

Licensed since 1994

Member at firm Adishian Law Group, P.C.

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Christopher M. Adishian, Esq.

Licensed since 1994

Member at firm Adishian Law Group, P.C.

AWARDS

AV Preeminent
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