Volume 8, Issue 17, November 4, 2021
I have recently encountered a few situations where partners in a business do not agree on the current plan for the company, with one partner(s) is ready to sell while the other(s) is not. This is often a situation unanticipated by entrepreneurs when they decide to become partners in a business. This is not surprising. After all, the focus at the time of the partnership is usually the start of the business rather than its potential or eventual conclusion. Thus, there is rarely a conversation about the end game — the exit when one or all owners are ready to retire or move on to the next start of their career.
A business partnership where owners have equal stake in the company can lead to a plethora of problems from disagreements in operations to exit strategies. Whether you're just starting out or already functioning as a super team, it's never too early to discuss the "what ifs" for future decisions. But wait too long and it can't be too late!
Mike Gillette is a friend, colleague, and a lawyer and shareholder at Polsinelli (firstname.lastname@example.org) who has helped many of my sellers transact. I asked him to share some insight from a legal perspective into how co-owners of a business should address issues that develop around disagreement about the future for the company. The following section summarizes his thoughts.
When potential issues with partners disagreeing on a sell decision arise, a good first step to take is to a look at the company's organizational or governing documents (e.g., an operating agreement or shareholder agreement) to determine how the entity is managed and governed, and how, if at all, disputes or disagreements among the partners relative to business or selling decisions are addressed.
In a situation where one partner(s) is in the majority and the other(s) are in the minority position, the majority owner(s) can sometimes unilaterally authorize a transaction under a structure where that the company itself is the party to the transaction — e.g., an asset sale or a merger. This can depend upon the scope of the majority's governing authority and any minority approval rights in favor of the other partners.
But even with strong majority governing rights, there could sometimes be issues in structuring a transaction that requires the minority partners to be parties to the transaction documents — e.g., an equity purchase transaction where the partners are the parties doing the selling.
Likewise, there could be issues where the ownership or governance is divided equally between partners who disagree on the path forward — e.g., a 50/50 ownership structure where the partners co-manage or comprise the entire board of directors, such that a deadlock is possible.
Partners often plan for these situations in advance by incorporating certain provisions in their organizational or governing documents. These can include the following:
I hope you found Mike's thoughts helpful. I'd like to share a few of my own from my perspective as a merger and acquisition (M&A) advisor.
Have a straightforward discussion with your partner at the beginning of your partnership or when things are going well. Outline some of the worst-case scenarios for your company, such as the loss of a partner, a desire to exit, or a difference of opinion around a significant issue, like the direction of the company or investing in growth opportunities. Engage an advisor like a lawyer or consultant who can help document how individual issues will be handled in an equitable way. Plan your exit strategy for the day when at least one of you wants to leave the company and come to agreement on terms and valuation methods. In other words, make a plan!
Although most of us never consider the idea of a prenuptial when we are getting married because it was "all about the love," statistically, about half of us would be much better off if we had. Fortunately, this subject is much easier broached in a business relationship since most people agree that business should be treated professionally and with an abundance of planning. It's important to sit down with your partner and discuss the difficult stuff while it's still just a concept and not a reality.
Michael Gillette is a partner in Polsinelli’s Phoenix office and a deal lawyer who brings a common sense and practical approach to negotiating and closing complex commercial transactions. Michael’s practice primarily centers on the representation of emerging and established companies, investors, and entrepreneurs across a range of industries, where he serves as a trusted advisor on general corporate and transaction-specific matters. He can be reached at email@example.com or +1 602.650.2307.
As Co-Founder of LifeShare, a multi-state human services and healthcare organization, Rachel has a unique background of over 20 years of successful operational and executive experience, in addition to an MBA in Healthcare Management. She began her professional life as a home care provider, an experience that created the foundation for the innovative quality and success of LifeShare, while also changing her life. At LifeShare, she managed their Operations (Adult Day/Residential; Child Therapeutic Foster Care; HCBS; Child Therapeutic Day/Diversion Services, and Educational Programming), Finance, HR and Quality Assurance (facilitating COA accreditation and policy/procedure implementation). After selling LifeShare to Centene, Rachel remained during the transition of management and helped to provide outcome measurements and COA compliance reporting. At VERTESS she is a Managing Director providing M+A advisor and consultant services, specifically in the I/DD, behavioral health and related healthcare markets, where systems are rapidly evolving, and providers are striving to adapt strategically to diverse challenges.