Much has been written about the dangers of 50-50 business partnerships and how to avoid the problems they can bring, but what do you do when you’re already in one and looking to unwind it in a way that appeases the demands of everyone involved? There are no easy answers, but it can be done through careful strategic cooperation between the parties.
To see how things can go wrong and still get resolved, let’s take a look at Bob and Tom. These gentlemen are partners in a paving company. Up to now, each of them owned 50% of the company, but Tom has decided it’s time for him to retire. Bob, who manages the office and supplier relationships, will be losing an active business partner who currently works side by side with the crews in the field. To further complicate matters, Bob and Tom have also made overtures to two key personnel, indicating that they will take over a portion of ownership at some time in the future.
How to proceed? Bob wants to buy Tom out over time, which makes sense; funding Tom’s exit from the company will put a strain on its finances. Trouble is, they have no buy-sell agreement in place and no real provision for exit in the company’s organizational documents. In their most recent meeting, Tom made it clear he wants to retire at the end of the calendar year, putting added pressure on Bob and the company to pay him out the amount he believes to be his portion of the value in one lump sum. Understandably, Bob is not crazy about this idea. Add to the mix that the promised successors wonder what their role will be and how they can move into ownership, and without financing and structure in place to accommodate the changes, everyone is confused.
The situation exposes a history of poor communication between the partners – about business planning. While neither party wants to walk away from a decades-long personal relationship, Tom is more focused on his own future than the future of the business, and Bob wants to force his hand in a way that will maintain the business but doesn’t take into account Tom’s wishes.
The potential if things continue down this path? A lot of bad feeling, a messy exit, and significant problems for those left behind.
The good news is, there is a way out of even a mess like this. There are several steps that Bob and Tom can take to work toward a solution that benefits the company and the individuals involved. There might have to be some give and take along the way, but there is a way.
Step One: Valuation
In the absence of a buy-sell agreement that clearly spells out the terms and consideration paid to an owner leaving the company, the first step is for the parties to agree to a valuation of the company. In the case of Bob and Tom, this would be the first and best place to start talking, because the rest of the negotiation stems from knowing what their company is actually worth. There are a number of ways to value the company, so it is best to usean accredited third party that knows which method is most appropriate and which one will not incur tax liability or other issues for the company down the road.
Step Two: Mediation
As you saw in the case of Bob and Tom, the problems stem from a longstanding lack of – communication between the two parties. Since communication is already a problem, it’s unlikely that it will improve when the situation is tense. It’s one thing for each of them to sit down and draft a list of demands; it’s entirely another to try to come together to iron things out and achieve a resolution. It’s unlikely this will occur if they are left to their own devices. The best solution is for Bob and Tom to retain a third-party mediator who represents the best interests of the company and all parties involved. Not only is this more likely to lead to a satisfactory resolution for Bob and Tom; it is also more likely to leave the company in better standing as it relates to key employees, staff, and customer relationships.
Step Three: Restoration
After Bob and Tom have hammered out their deal, which will likely result in some kind of multi-year payout on Tom’s departure from the company, there is still the matter of the key employees who have been promised an ownership stake. The amount of their ownership, the method by which it will be funded—cash or bonus—and buy-sell agreements must all be determined. In addition, Tom’s departure leaves a hole in management of employees in the field that must be filled with competent internal management or through the acquisition of a new manager.
By working through all these steps carefully and diligently, Bob and Tom can achieve an agreement that will give everyone involved a resolution that they can be happy about.
None of these issues, taken alone or together, is a condemnation of entering into a 50-50 partnership. Some of the best businesses in the world spring from that foundation! But Bob and Tom’s story should be a strong reminder to you to look at how your business is built. If you’re set up as a 50-50 partnership and don’t have these issues ironed out, it’s best to do it now rather than have to manage them later when you’re under an enormous amount of pressure to get things managed.
If you need help navigating exit from a partnership, or for more information on the subject, contact me at julie.kauffman@kcoe.com.
