Key Takeaways
- Five exit mechanisms: agreed sale, buy-sell, ROFR, put/call options, and partition.
- The shotgun provision incentivizes fair pricing but favors the wealthier partner.
- Capital partners should secure put rights after a defined hold period.
- Planned dissolution takes 6-12 months; disputed dissolution can take years.
Every JV must eventually end. Clearly defined exit mechanisms prevent deadlocks and ensure orderly resolution.
JV Exit Mechanisms
Common mechanisms: (1) Agreed sale—both parties agree to sell and wind down. (2) Buy-sell (shotgun)—one partner names a price; the other must buy or sell at that price. (3) ROFR—a selling partner must first offer to the other at the same terms. (4) Put/call options—capital partner can force sale after a defined period; operating partner can buy out. (5) Partition—judicial division (extremely rare).
The Buy-Sell (Shotgun) Provision
The shotgun is the most common deadlock resolution mechanism. Partner A names a price; Partner B must buy A's interest at that price or sell their own at that price. The mechanism is self-regulating because the naming party must be willing to be on either side of the transaction. However, it favors the wealthier partner who can more easily fund a buyout.
Dissolution and Wind-Down
Dissolution involves selling the property, repaying debt, satisfying obligations, distributing proceeds through the waterfall, and dissolving the entity. The Operating Agreement should specify the timeline, sale process, obligation handling, final accounting, and tax considerations. A planned dissolution takes 6-12 months; a disputed one can take years.
Guided Practice: Triggering a Buy-Sell Provision
In a 50/50 JV, Partner A wants to sell and Partner B wants to hold. Property worth approximately $4M.
- 1Partner A triggers buy-sell by naming $4.1M.
- 2Partner B has 30 days: buy A's 50% at $2.05M or sell their 50% at $2.05M.
- 3Partner B believes the property is worth more and decides to buy at $2.05M.
- 4Partner A receives $2.05M; Partner B now owns 100%.
- 5If B believed it was worth less, they would have sold instead.
Key Takeaways
- ✓Five exit mechanisms: agreed sale, buy-sell, ROFR, put/call options, and partition.
- ✓The shotgun provision incentivizes fair pricing but favors the wealthier partner.
- ✓Capital partners should secure put rights after a defined hold period.
- ✓Planned dissolution takes 6-12 months; disputed dissolution can take years.
Sources
- Preqin — JV Exit Mechanisms and Buy-Sell Provisions(2025-01-15)
- IRS — Partnership Dissolution and Liquidation(2025-01-15)
Common Mistakes to Avoid
Not including a buy-sell or deadlock resolution mechanism in the operating agreement
Consequence: Partners become locked in an irreconcilable disagreement with no path to resolution, potentially requiring costly litigation
Correction: Include a shotgun/buy-sell clause and a staged deadlock resolution process (discussion, mediation, arbitration, shotgun) in every JV operating agreement
Triggering a shotgun provision without adequate financing to complete the purchase
Consequence: If the other partner accepts the buy offer, the initiating partner must close; failure to close creates default and potential litigation
Correction: Never trigger a shotgun clause unless you are prepared and able to either buy at your stated price or sell at that price
Test Your Knowledge
1.What is a "buy-sell" or "shotgun" provision?
2.What is a ROFO (Right of First Offer)?
3.What should a dissolution plan include?