Should one or more members "buyout" a withdrawing member?
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Should one or more members "buyout" a withdrawing member? Club
members and treasurers often ask ......
Should one or more remaining club members "buyout" a withdrawing member? First, before I answer that question, let's define a
"buyout". A "buyout" is where one or more people buy the units
of a withdrawing member directly from that withdrawing member.
In such a situation the money and units transfer directly between these parties
and not the club.
The simple answer is NO! While technically
it may be possible for one to sell their share of the club directly to
another, doing so creates an accounting nightmare for the club.
What is often called a buyout is not a buyout at
all. In most cases, a member is withdrawing from the
club and one or more remaining members want to make increased payments to the
club. The withdrawal is paid by the club, LIQUIDATING the
units of the withdrawing member, and the extra payments are made to the
club by the remaining members, whereby the club issues NEW units to those
members. Nothing transfers directly between
members. If those two transactions happen by coincidence to be
recorded with the same valuation date, the newly issued units will have the
same price as those liquidated by the withdrawing member.
That was the simple answer. The issue gets
more complex because many clubs charge withdrawing members a withdrawal
fee. This fee is often designed to reimburse the club for the
eventual costs of liquidating its portfolio. If so, the club may
feel that these members, who made extra payments, prevented the club from
realizing any current liquidation expenses. Therefore, the club
wants to pass on a credit for the withdrawal fee charged of the withdrawing
member to those members making the extra payments.
I think it is helpful to demonstrate such a transaction by
using a simple example.
Let's assume Member X is withdrawing. His account is valued at $1000. The club charges a 3% withdrawal fee so the resultant payout will be $1000 less 3% which results in a net payout of $970. Enter this withdrawal as you would any other withdrawal. Now , let's assume that two remaining members, Member A and B, desire to make additional payments to the club so the club doesn't have to reduce its stock holdings to pay off the withdrawal. Provided that the club's partnership agreement allows for such extra payments and the allocation of a credit for the withdrawal fee to members making additional payments , each member could simply make an extra payment equal to 1/2 of the net withdrawal payout. In other words, each member would make an additional payment of $485. BUT WAIT, don't enter the payment that way! Here is the trick, if you want to call it a trick.... Enter a PAYMENT from each of these members of $500. Then enter a NEGATIVE FEE from each of those two members of $15. Notice that after you enter the positive $500 payment and the negative $15 fee the net result matches the $485 actually received from each member. The effect is that Member A and Member B each contributed an additional $485 but each received $500 worth of units, thus they each received a 3% discount. If the withdrawal, extra payments, and fees are all entered into bivio using the same Valuation Date, the club will have exactly the same number of units outstanding after the withdrawal as it did before the withdrawal, the members making the extra payments will receive a discount for their additional payments, and the club will have the same total value immediately after the transactions as it did immediately before the transactions. Also, no units or money transferred directly between members so no "buyout" took place. St.Louis, Missouri Trez_Talk@bivio.com |
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