It seems so simple and equitable. Two friends (or colleagues) decide to go into business together and split everything 50/50. Decisions, profits, everything-right down the middle. In the beginning, this arrangement probably worked well. But, with the passage of time and experience, this arrangement might not be ideal. Partners find that they have different skillsets, workload expectations, financial needs, and time frames. As a result, while the partners remain friendly, the internal frustrations grow, and that congeniality may devolve into silent passive-aggressiveness or even hostility.
This situation is adverse for many reasons, not the least of which being the owners don’t feel compelled to discuss important longer-term planning issues. And, when unforeseen circumstances arise, then the owners can find themselves in a protracted stalemate.
Owners can avoid operational disagreements by deciding early on (preferably in writing) which owner has the final say in various areas of the business. Some owners will gravitate to having a more significant voice in sales, others in product development or marketing, etc. When there is a disagreement, it comes down to the area in question with regard to who makes the final decision.
What about the big decisions like selling the company? What happens when one owner wants to sell the company, but the other does not? With my exit-planning partner firm (NAVIX Consultants (www.navixconsultants.com)), we anticipate potential disagreements in the ownership agreements. I list three examples below, along with our suggestions on how to address. No doubt that there are many other approaches.
Partner-owners want to separate. A remedy here is a “Take it or pay it” approach. One partner wants to separate; he makes a conditional buyout offer to the other owner. According to this agreement, the second partner can either pay the amount and own the whole company. Or, he/she takes the amount and walks away.
One owner (A) wants to sell, but the other (B) doesn’t. Owner B should have to buy out the seller (A), but it should be at a ~25% discount and ability to pay over a manageable number of years. If owner B sells later to an outside buyer, the bought-out partner (A) should be made 100% whole if the sale happens within 1 or 2 years. The differential would scale down to 0% whole by year 3 or 5.
Owners decide to put the company up for sale. Beforehand, the partners agree to a minimum acceptable offer. If above, then the partner wanting to take it “wins” (i.e., has the final say). If below, then the partner not wanting to take it wins.
Questions? Please contact us at DM Buck Advisory, LLC (david@dmbuck.com).
Based in Atlanta, Georgia, DM Buck Advisory, LLC provides business owners valuation/appraisals, stronger messaging with investors, or, through our partnership with NAVIX Consultants, a practical roadmap towards a more efficient and successful ownership exit.
