Club deal terms to agree on before closing
Built on Chapter 12 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
Club deals break down for predictable reasons. Most of them can be headed off with a short list of terms agreed before anyone wires money. In the book, I shared a set of club deal guidelines from a family office executive I interviewed. Here is my plain-language summary of the points that matter most.
Get it in writing early
Most clubs start with a letter agreement before closing, then move to formal documents once the vehicle is chosen. The letter does not need to be long. It does need to cover who is in, who leads, and how costs are handled while the deal is still in play.
Choose members with care
Look for partners who add something beyond money. That might be industry knowledge, a track record of exits, useful relationships, or credibility with the seller.
Look just as hard at fit. Partners should share a similar style on debt and dividends, plus a similar time frame. Watch for conflicts of interest and for anyone with strong personal ties to management.
One point from the guidelines stuck with me. The more members a club has, the more likely the deal is to fail. Keep the group as small as the check allows.
Leadership and roles
Agree on a leader up front. Each member names one person to speak for it through the deal. Every task should be written down with an owner and a deadline, and the leader should track them and keep everyone informed.
Communication with the company should go through the leader. Several partners calling management with different questions creates confusion and annoys the seller.
Plan for the bad case too
The club should agree on the basic business plan and on what happens if it goes off track. Will members put in more money? Who decides? Settling this early avoids many of the worst fights.
Costs and advisors
Agree on which advisors the club will use for the legal and tax work, and how fees are capped. Only the leader should give advisors instructions. If every member hires its own lawyer for the deal, the bills climb fast.
Agree on who fronts expenses and how they are repaid, including if the deal dies. Never front costs without a written agreement to be paid back.
Fees and governance
Decide whether the person who found the deal, or the leader, earns a fee or extra equity. Decide how other fees are shared.
Before closing, most decisions are usually unanimous. After closing, normal company rules apply, with certain big decisions needing a super-majority. Be careful about giving small holders the power to block decisions.
Agree on board seats, observer rights, and voting. Each member should get regular financial updates, often routed through the leader.
Transfers and exits
Agree on what happens if a member wants to sell its stake. Common tools include first refusal, tag-along and drag-along style rights, and limits on transfers to affiliates. Watch for transfers through an affiliate or SPV that quietly change who controls a stake.
Agree in principle on when and how the club will exit, and whether any member can force a sale.
Protecting the deal
Members should disclose conflicts in writing. Non-compete terms should block investments in direct rivals without being so broad they block normal business. A no-poaching clause for key staff is a sensible minimum.
Members who see confidential information should agree not to go around the club or make a competing bid. Confidentiality should last for the life of the investment plus a set period after. Press announcements should be approved by everyone.
Vehicle and disputes
The club might use a holding company, a co-investment agreement, or simply the company's own shareholder agreement. The choice should not hurt any member's tax position. A binding arbitration clause can keep disputes fast and private.
What to take from this
- Sign a letter agreement before closing that names the leader and covers costs.
- Keep the club small and choose partners with matching styles and time frames.
- Agree on the plan for bad times before closing.
- Settle transfers, exits, and confidentiality in writing.
This page is general information, not legal or tax advice. A club deal needs experienced legal and tax counsel before any documents are signed.
Questions and answers
What should a club deal agreement cover? Members, leadership, costs, advisors, fees, governance, transfers, exits, and confidentiality.
How many partners should a club deal have? As few as the deal size allows. More members tend to mean more risk of failure.
Should each member hire its own lawyer? For the shared deal work, it is usually better to agree on one set of advisors.
Who talks to the company? The club leader, so the company hears one consistent voice.