Successful private company owners often share the traits of having vision, passion and a strong sense of purpose. This does not mean that they govern their companies without having any disagreements with their minority partners. In fact, it is common for business partners to have different views of the company and its growth plans because there are different ways to grow a business successfully and when challenges arise, the best way forward is not always clearly. When a majority owner has serious disagreements with a minority business partner, the question the owner must answer is whether it is time to say goodbye. This post offers some thoughts that majority owners should consider in answering this question.
Is a business divorce available?
The first question that most business owners must answer when serious conflicts arise with their business partners is whether it is even possible to secure the redemption (exit) of the partners who hold a minority stake in the business. In other words, does the majority owner have a valid contractual right to remove a dysfunctional business partner from the company? This legal remedy will exist if the majority owner has a buy-sell agreement or other means to induce a redemption of the minority partner’s shares in the company.
It is always best to create a partner exit plan at the time the minority partners join the business so that it is clear that the majority owner has the right of redemption if things go south. Absent this type of contract right, the majority partner may not be able to secure the exit of a disruptive minority owner without mutual agreement. There are limited circumstances in which majority owners can create a new right to secure the exit of a non-performing minority business partner, but this will require a detailed review by legal counsel of the company’s governing documents and any other agreement existing between the owners.
Determination of the nature of the dispute
When businesses are on a successful path, they are alive, they are creative and they are agile in meeting challenges. They have commitment among leaders who act as a team. The company may have a dynamic leader, but he or she will want to be surrounded by smart colleagues who offer fresh ideas and don’t just serve as an echo chamber for the majority owner. In this environment, it is common for leaders to have respectful disagreements, and their efforts to develop consensus are both healthy and necessary.
Where disagreement between business partners becomes dysfunctional is when one of the minority owners or a small group does not work towards this common goal, and instead pursues a separate agenda that elevates their importance. In this situation, the company will be divided by competing visions of the business plan, factions will develop among employees, and this will lead to internal strife that will either slow down the growth of the company or, in the worst case scenario, destroy it. completely the company. success.
The question the majority owner must immediately try to answer is whether disagreements with a minority business partner simply reflect differences in approach, style or tactics, but are still consistent with the desire for the company to prosper. If so, it may be that aspects of the minority partner’s views can be incorporated into the business plan. But if the minority partner is clearly driven by ego, if the partner will not support the team’s decisions, if the partner asks for distributions and is unwilling to re-invest in the business, and finally, if this partner takes actions that undermine the company when his or her ideas are not adopted, the continued involvement of this partner will be a drag on the company that is likely to become more acute over time. When this conclusion is reached, the majority owner must act decisively to seek a separation from the minority partner that preserves the company’s culture and vision.
As discussed above, redemption of a minority partner is likely to be possible only if the majority owner is able to exercise a buy-sell agreement or has a similar right of redemption in the company’s governing documents. In the acquisition process, the majority owner will want to pay attention to the valuation process and the calculation of the amount to be paid for the minority partner’s interests. The formula used to determine the purchase price will be set forth in the sales agreement or governing document.
In many cases, the formula for determining the purchase price of the minority interest will specify that the price will be subject to discounts based on the lack of control and lack of marketability of the minority interest. Even if the formula does not refer to the application of these deductions, unless they are specifically excluded, the majority owner will want to insist that the appraisal be subject to these deductions because they are substantial and supported by Texas statutory authority. and from the usual assessment practice.
Whether a majority owner should take action to secure the exit of a business partner who holds a minority stake in the business is a difficult decision. Before going down this route, the majority owner will first want to confirm that: (1) he or she has the right to discharge the partner in a written agreement and (2) that the nature of the dispute with the partner is serious enough to ensure that this decisive action is taken. Finally, once the decision has been made to redeem the minority partner, the majority owner will want to monitor the valuation process to ensure that the purchase price paid for the minority interest conforms to industry standards and includes all discounts of applicable minority.
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