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It is a unique pleasure to find two equal partners or shareholders acting in harmony over selling a business. Unfortunately, when I say “unique”, I mean rarely ever. Please understand, it is not as if this never happens. It is just so unusual, that when faced with the situation, I’m simply delighted to not need to resolve the equal partner deadlock!
Challenges Facing Business Partners Looking to Sell Their Business Typically Falls Into One of These Scenarios:
The Stubborn Mule Business Partner Syndrome
This is where both partners agree it is time to sell the business. One works diligently toward that end. He or she gathers the requested documents, attends all of the meetings, makes time for consultations, etc. With some hard work and a little luck, they receive an offer to buy their business. This is when the other partner shows up and says, “no, that offer won’t do.” In fact, he or she goes on to tell the buyer, or their agent, “that amount of money is not even half of what I will sell this business for.” You see, the stubborn mule partner typically has a different valuation calculation and it usually results in an offering price twice that of any willing buyer.
Co-shareholders Riding the No Rules–So Too Bad Gravy Train
In this scenario, the equal shareholders never put in place any agreement whereby one or the other shareholder could initiate or trigger the purchase or sale of their portion of the business to the other or to a third party. This is a very dangerous situation for the business, the shareholder’s families, as well as the employees. So many things can change over the course of one’s life. Disability, divorce, death, or the sudden onset of “deadbeat” or irresponsible behavior is a real threat to any partnership. Without a written agreement, whereby the specifics are defined to resolve such situations, many unforeseen situations could expose all parties related to a business enterprise to danger.
In this scenario, one of the two partners wishes to sell their share of the business to the other partner or wishes to acquire their partner’s share of the business and hold 100% ownership. Given the fact that prior to this point in time the two partners had not negotiated the terms of such a sale or acquisition, they suddenly find themselves at odds. How do the partners now fairly negotiate a valuation formula when they each may have a differing opinion of the financial facts to be used in the formula?
Typically, it is in the best interest of one of the partners to acquire the other’s share of the company. And at the same time, the other partner wants to hang on as long as possible. The partner wants to stay on the gravy train, and because no prior rules have been established, this partner simply does not respond to any sale/acquisition conversations. They adopt the “no rules–so too bad” strategy. They hang on and make everyone miserable.
The Till Death Do Us Part Reality of Equal Business Partners
If you’ve ever been married, you know what having a 50-50 relationship is like. I often joke with would-be entrepreneurs who tell me they want to start a business with their best friend. I ask them: “Would you marry this best friend?” If not, then please reconsider. It’s really not a joke at all. It is a valid question for anyone considering taking on a 50-50 partner in business.
Just as it is common to find deadlocks between spouses, it is also common to find deadlocks between siblings in family businesses when it comes time to resolve ownership issues. Often these partners and family business members have worked side-by-side for decades. And in many cases, these relationships are relatively good relationships. Relatively good that is until it is time to sell the business.
In this scenario, the terms of the agreement to sell to a third party are never agreed upon in advance. Negotiations between the partners linger on for months, years, even decades. In reality, these partners may actually take their business to their grave…Till Death Do Us Part.
Creating a Cross Purchase Agreement with your Business Partner
If you are fortunate enough to be in the planning or early start up phases of your business and you have a partner or partners, you have an opportunity to create a workable cross-purchase agreement to avoid these deadlocks later in your entrepreneurial journey. Stop what you are doing and make this a priority!
If on the other hand you are already far along and in the midst of a sale or acquisition attempt with your partner(s), it’s a good idea to create some basic guidelines for conduct before you proceed further. Stay tuned for tips on developing these selling ground rules for multiple owners in my next blog post.