Using push-pull agreements to determine value
Push-pull agreements are great, but they almost never occur in daily life. They’re designed to enforce fair pricing of difficult to price (usually illiquid) assets.
Let’s say I own half of a bakery and my partner wants to sell the other half. She can’t sell without my permission, and similarly I can’t sell without her permission. What do we do at an impasse?
Hopefully, our partnership agreement contains a push-pull provision. I offer my partner $250k for her half of the partnership. She is now in a very interesting position and has two choices:
- Accept my offer and sell her half of the partnership for $250k.
- Decide that my price is too low and instead buy my half of the partnership for $250k. In a push-pull agreement, I have no choice but to accept this offer.
Because of the risk of #2, I will be sure to offer a “fair” price straight off the bat. Some of you may recognize that a push-pull is basically a glorified version of the childhood method of distributing a bounty between two participants: “you cut, I choose.”
Is there anything you use a push-pull for in your daily life? This is a great way to assign rents between 2 roommates, but it totally breaks down when there are more than two participants. The solution for that will come in a future post.