Retirement,Nonmarket Valuation,and Partnership Contracts

Abstract

This paper analyzes a potential hold-up problem facing a senior partner contemplating retiring from a partnership at some expected future time. Two scenarios are considered. In the first, the partner wishes to exit with a fixed amount in hand. In the second, he wishes to maximize his payoff from the partnership. It is shown how typical contractual features of partnership agreements, namely, profit distribution and buyback clauses, solve the retirement problem both for the case where a ready buyer is available at the expected exit time and, more importantly, for the case where the partnership is not freely marketable and the only potential buyer is another partner. Provided discount rates are assumed to be exogenous, this analysis also solves for the appropriate valuation discount to be applied to the value of a partnership (relative to an equivalent public company) as a consequence of the limited marketability of the partnership form.