Resolving Co-Owner Disputes Maximizes Your Final Sale Price

Speaker A: Identify what the potential solutions are. Right. Some of the solutions might be one partner buying the other partner out. Some solutions may be just trying to uncover, hey, what's at the root of the disagreements here. Buyers are going to see right through any partner conflict, even if you tried to disguise it. And as a result that's going to, you know, that's going to lead to a lower valuation and fewer interested buyers just because it's very difficult. When you layer on family dynamics on top of business dynamics, the odds of that going well are pretty low.

Speaker B: Welcome to M M and A Talk, the number one podcast on all things related to mergers and acquisitions. Brought to you by Morgan and Westfield, a uh, nationwide leader in mergers and acquisitions for small to mid market companies. We bring you exclusive interviews with industry experts in business sales, valuation, private equity, investment banking and more. It's our mission to provide you with insight and guidance on how to build your company's bottom line and maximize value for eventual sale. Here's your host, Jacob.

Speaker C: This is Jacob Oros, your host and president of Morgan and Westfield, a nationwide M and A firm. And if you're considering selling your company and if you'd like to work with me throughout the process, you can schedule a free consultation@morganandwestfield.com and I'll have that link in the show notes. Or if you'd like a free copy of, uh, one of my two recent books, the Art of the Exit or Acquired. I'll also have a link to download those in the show notes. And we've also produced a course on selling a business, the Art and Science of Selling a Business. And I'll also have that link in the show notes as well. And now on, uh, to today's show, we're going to talk with Chris Younger with Class 6 Partners, an investment banker and we're going to talk about selling your company due to a partner conflict. And Chris, welcome to the show.

Speaker A: Thanks so much, Jacob. Appreciate it.

Speaker C: Partner conflicts about as common as relationship issues. How often as an investment banker, how often do you encounter that look, uh,

Speaker A: whenever you have multiple owners of a business, they're likely going to have different agendas. They're likely going to have different perspectives and in some regard that may be why the business has been successful, that you have this hopefully synergistic combination of different perspectives and hopefully the partners have good ways to resolve those differences and move forward, you, uh, know in unison. But I don't know that I've ever come across a partnership where, you know, the partners agreed about everything. So it's very common. And in the best partnerships, it's not only common, but it's productive. In the worst partnerships, it's not productive and sometimes damaging to the business. And so particularly when you get to a, uh, sale event which is highly charged emotionally. And a lot of partners can have different motivations. You might have one partner who is interested in keeping the business, they want to continue to grow, and you have another partner who wants to sell and retire. And sometimes the partner conflicts, if they're not managed appropriately, can lead to that desire to sell. Right. Because it's not any fun anymore.

Speaker C: What is your recommendation? And this is a scenario, uh, that we encounter a lot when there's no buy sell agreement. That's a tough one because you can't force a sale. How do you usually see those play out? And what's your recommendation to those owners?

Speaker A: You know, that's where if the partners are at loggerheads, and particularly if it's a 50, 50 partnership where neither party can force the sale or drive a process, uh, that's when you do want to bring in professional help to try to resolve the conflict, identify what the potential solutions are. Right. Some of the solutions might be one partner buying the other partner out. Some solutions may be just trying to uncover, hey, what's at the root of the disagreements here and how do we address that. Right. So getting, uh, some type of counselor, not any different than a marriage. Right. And there are folks out there that specialize in that. Or, hey, the solution here is to go find a third party to buy the business such that one or both partners can work towards their retirement. So you have, you know, there's a number of different options that are available and it really comes down to at some level, how well is the business doing in spite of it. You know, if there's a lot of partner conflict and the business performance is not going well, your options get a lot more limited. Buyers are going to see right through any partner conflict, even if you tried to disguise it. And as a result, that's going to lead to a lower valuation and fewer interested buyers just because, you know, sophisticated buyers know that if there's been partner conflict, there's a, there are probably a lot of things that have been ignored or, or are going to be diligence issues for them when they get down the road.

Speaker C: Do you think you should disclose that to a buyer?

Speaker A: 100%? I think, uh, you know, in my role. Right. As an investment banker, you know, part of what we want to articulate to a buyer is the reality of the situation because you know, when you're soliciting bids and soliciting interest, if you paint a false picture, it's going to get uncovered. And all that means is you're going to spend a bunch of time and money until it gets uncovered and then you're going to deal with whatever the fallout is. Now, there are ways to position partner conflicts in productive ways in a sale process. You know, a lot of times it, we position it as, look, one partner wants to take the business this direction, the other partner wants to take the business in this direction. We've concluded that the best solution here is to find a buyer who is aligned with, in most cases, the partner who wants to grow the business. And that's why we're out talking to folks. And so post closing, this partner's going to transition out and this partner is going to continue.

Speaker C: Can you sell a 50% stake in a business?

Speaker A: Most buyers are going to want to buy a majority of the business. They're going to want to have some control. And even if they bought 50% or 40% or 30%, they're going to add a number of terms and conditions to the deal, which may not give them full control, but it will give them control over the major decisions that are being made. Whether that's a capital decision, a sale decision. Those are the types of things that they're going to want to have veto power over.

Speaker C: So if you own a business and you own 50%, is there any way to force your other partner out?

Speaker A: I don't know that unless there's a buy sell in place that allows the, uh, you know, one partner to either force a sale of their interest or force the purchase of their interest, it really comes down to, again, it's back to the conversation with the owners, right? In terms of what are you trying to accomplish? You know, I think you can be pretty creative in terms of what the right solutions are, but you've got to get them into a room and having that productive conversation. Because if you can't even get alignment around the different solutions, the odds of you having a, uh, successful transaction are pretty low. Because at some point somebody's going to break and that's going to come through in diligence, it's going to come through in lack of participation, whatever that may be, it's going to cause problems for the transaction.

Speaker C: What if you're at a stalemate with your partner and at this point you're not even on talking terms?

Speaker A: A lot more challenging, right? And that's where bringing somebody in who's a professional and understands, almost like a mediator or a counselor that can have the conversation with one party and understand what they're trying to accomplish, have a similar conversation with the other party and figure out what they're trying to accomplish. And the best of them will figure out some solutions. Because it truly is in both partners best interest to find some solution, because otherwise they're going to be stuck. And when we see that, that means that the business performance is usually suffering because they're lacking direction or they can't get alignment. And that's always going to be bad for a business.

Speaker C: I think the point we're making here is that if you own a 50% stake and you're not in talking terms and you have no buy sell, you pretty much have to go talk to your partner, work something out.

Speaker A: Don't you have to?

Speaker C: Yeah, because nobody's going to buy that 50% stake, are there?

Speaker A: Uh, definitely not if the other partner's not involved in the sale process. Right. Because no one wants to step into that type of conflict or issue.

Speaker C: Now, this coach that you're talking about, what types of people do that?

Speaker A: Yeah, these are professional business coaches. Might even be a psychologist or a counselor that does this for a living. There are people out there who, like I said, this is their specialty is dealing with business partner conflicts and how to get them resolved. Look, most problems like this are just communication, Right? It's all about communication and trying to get a deeper understanding of what both parties are trying to accomplish. And then hopefully you can move towards something more productive.

Speaker C: What happens in businesses from a communication standpoint, why the breakdown?

Speaker A: Usually, uh, it's a lack of trust. Right. My old mentor used to tell me, if I trust your intent and you trust my intent, uh, we'll be able to have any conversation. Right. Because I trust that you're trying to do the best thing for the business. If I don't trust your intent, it's very difficult to have an open conversation. I'm going to be guarded. You're going to be guarded. I'm not going to trust what you're saying. And that makes it near impossible to get to a resolution.

Speaker C: Now, let's assume that you get things back on track here and you can work something out. How do you think you should decide whether or not you want to continue in partnership with someone in a business?

Speaker A: It comes down to what the alternatives are. Right. Is the alternative of running the business a better alternative than one partner selling his or her stake to the other partner or finding a new investor that can take most of your equity out, uh, that becomes, I mean, that's a purely personal decision. Right. In terms of what's the best answer for each one of those partners individually. And that always has to be done in the context of what are the alternatives.

Speaker C: What percentage of the deals do you think you've worked on historically have had some sort of partnership disagreement?

Speaker A: If it's a true disagreement getting in the way of a deal, it's pretty small. I would say we're less than 5 or 10%. Now, will partners have different opinions about a, uh, transaction or the best buyer or the deal? Yes. But if it's a healthy partnership, they'll resolve those. And rarely do we need to get involved to mediate those. Every once in a while we do. But again, part of this is also just the context of what's available to those partners as potential solutions. And usually, right. If you've run a good banking process and you've gotten good valuations, that tends to help persuade people on the right path because now all of a sudden they can see, hey, I can get this liquidity and that could make some things possible that aren't possible today. So I'm motivated to get aligned with my partner and, um, get this deal done.

Speaker C: To what extent is it possible to raise capital to buy out a 50% partner?

Speaker A: Depends on the business. If it's an attractive business and it's doing well, pretty easy. There are lots of conversations today right around the amount of dry powder out there in the private equity markets. And if you have, ah, a really healthy business, there's lots of folks that'll be interested in buying out that 50%. They may want to buy some of yours as well or structure the deal

Speaker C: in such a way that they want control, won't they?

Speaker A: Yeah. And if you think about their role, right, they're investing other people's money and so they have a fiduciary obligation to take care of that money and make sure that it's done in the best way possible. And by doing that, you know, with that obligation, that usually means they've got to build in some guardrails for how that business is managed. And when they can exit, is there senior capital that can be brought in and under what circumstances, et cetera.

Speaker C: Now, what kind of issues have you seen with family members?

Speaker A: How long do we have? You know, it's funny, I was just talking to a client of ours who their family is now in the fourth generation of owning a very, very large business in the Midwest, and I was just Commenting to him, because I've met some of the fourth generation, and you know these folks, they're in their 30s, incredibly well adjusted, hard working, focused, smart. And I commented to him, I said, uh, we don't see that very often. Right. It's rare that you see a business that can last that long in a single family and through multiple generations. And part of the reason, I think, is if you think about the traits that are required to be a successful entrepreneur, I've always said I think one or two people in a hundred are temperamentally suited to be an entrepreneur. With the pressure and the loneliness, the challenges, being the last person paid the first one in the last one to leave all of those things that business owners go through, for most people, that's not attractive. I also think that when you think about an entrepreneur as a mother or father, that can be pretty challenging for their kids. Businesses are really jealous mistresses. Right. And so that a lot of times can take a lot of time away from being the best father or mother that you can be. And so, and for entrepreneurs, kids, they watch what their parents, parent or parents have been through, and their desire really to replicate that a lot of times is nil.

Speaker C: Yeah.

Speaker A: And like I said, uh, the odds are that they're not really suited for it either. Right. They're not suited for that kind of stress. And so. And that's why transitions from generation to generation are pretty tricky and very challenging. I think it all starts with really solid core values in the family being very intentional around, what does it take to work in this business and what do we expect as a family and as owners? But like I said, uh, I'm starting to get to know this client and their family. And I really want to understand in more detail, how did you do it? Right. I do think it all starts with core values and being pretty open and transparent about that. Uh, but they've done a really good job. That's the rarity. Most transitions that we've seen usually have their challenges, particularly if you get to the third generation, if it's a very, very successful business and they've set up wealth transfer, a lot of that drive that's required to be an entrepreneur disappears.

Speaker C: It's diluted. Yeah. By the time it gets down to the third generation.

Speaker A: Yeah. You got a big trust fund. Why do I need to work this hard? So it's a, like I said, the whole family dynamics is really tricky. The other thing that I've seen, and we've watched this several times, you have brothers or sisters and cousins, right? All the same generation involved in a business because maybe the parent was in business with one of their brothers or sisters and then they transfer it to their kids. The odds of that going well without really, really firm governance are pretty low. Just because again, lots of voices in the room, likely not that experienced different motivations. So it's like I said, it's very tricky.

Speaker C: Well, uh, wonderful advice. Let's take a quick break and we'll be right back. This is your host, Jacob, and thank you for listening to the show. If you're interested in selling your business and you'd like to work directly with me, you can go to morganandwestfield.com and you can schedule a free consultation. And like I mentioned, you'll work directly with me throughout the process. And now back to today's show. Welcome back to M and A talk with Chris Younger. Chris, what about passing on the business to that next generation? What's your advice to parents out there? And I encounter this a lot, that they're not really sure if their kids are up for the challenge.

Speaker A: Yeah, like we talked about, a lot of times, kids are not up to the challenge. I do think most parents that want to transition a business to their children, they do it with the right intent. I want to give my kid a leg up that I didn't have. I want to accelerate their development. I want to, you know, hopefully make their life easier than what I had as an entrepreneur. And they really do need to have a candidate, likely third party assessment of the capabilities of the next generation and desire right back to getting somebody in that can do some counseling to really understand do the kids want to do that. Because as you well know, to be an entrepreneur not only requires the right temperament, it requires the ability to deal with a lot of pain and stress and persevere through that. And if you don't have that drive that an entrepreneur needs, that's not going to work out too well. We've had this conversation a lot. You, whatever imposter syndrome we all have as entrepreneurs is probably quadrupled for a second generation business owner.

Speaker C: That is a very good point.

Speaker A: Yeah, they're always going to be asking the question, am I here because of my talent or am I here because of my mom or dad put me in this position. So it's not dissimilar with our clients in our family office. You know, we talk a lot about, like I said, I think most parents have the m purest of intent when they transition money to their kids. But a lot of times what that can do is Demotivate a kid because they no longer feel like they have to work that hard. And, you know, for those of us that, you know, when you build a business or you're successful in your career and you've done it on your own, you. I mean, that's a lot of the personal gratification and confidence building, you know, that's happened in our lives. And, you know, my wife and I talk about it a lot. You don't want to do that to your kids. Right. To strip that away or to have them feel like, yeah, I'm only here because I got this gift.

Speaker C: What about you? If we can get personal here for a moment, if it's okay. What about your. Do you have children?

Speaker A: I have three.

Speaker C: And the magic question is, what do they do?

Speaker A: My oldest is a software engineer. My second oldest is in private. Private equity, um, out in Boston.

Speaker C: Okay. So kind of followed your footsteps there. Yeah.

Speaker A: I always get the question, are you going to bring her into the business? And the answer is no. For the reasons we just talked about, I don't really want to do that to my kids. I want them to succeed on their own and feel like they've done everything on their own because I know how challenging it can be. But I also know that's where a lot of satisfaction in life comes from. And then my third is a, uh, junior in college.

Speaker C: What do you learn in terms of bringing up your children and helping them foster their own careers?

Speaker A: I don't know. I. I'm pretty sure we've done a lot of things wrong as parents. I'm sure that's true for most parents, but we've really just encouraged them to really strike out on their own, do their own thing, you know, for college. We said, we'll lend you the money, and we got a little bit of flack for that. Right. Uh, all their friends, parents were paying for their college, but we really wanted them just to internalize that cost because they're. It's expensive and to be thoughtful about that investment of time and money in their education. And we've been very fortunate. Our kids did really well in college. And like I said, I have two fully off the payroll and one very much on the payroll. But it's been really, really fun and gratifying just to watch them develop because they're very successful in their own right. And I think other than letting them know, hey, there's really no pot of gold for you here in our household, we're going to support you in any way we can, you know, psychologically, and personally and everything else. But like I said, I've just watched too many bad movies where, you know, a parent has gifted a kid a bunch of money and then, and then you, you watch what happens with their motivation or their drive or their just perception of their own self worth. Right. It, it shifts it. And that's usually not for the good.

Speaker C: That's an outstanding point. Their impact on their self worth. Why is that?

Speaker A: I think it's because if you no longer have that, you, uh, know, think about your own life and your own career. If you don't have that drive to be successful and that need to be successful. Right. Because I've gotta pay for my kids or my house or my car or whatever it is. There's a, uh, certain satisfaction that comes from overcoming all those challenges. Right. And we've all been through them and, and sometimes they're harder than others and we've, we've all experienced that. But I, I do think it's the overcoming of all of that that creates your own self worth. It creates your own confidence. It reinforces this notion that, ah, there's no challenge that's going to be too big for me. I, I can handle it. But if, hey, if at the first sign of trouble because you've got this big trust fund, you could bail, then you've missed out on that opportunity. And I do think it, it really starts to erode purpose for you. And you know, one of the things that I do know is if, you know, if you don't have purpose in your life, you're likely going to fill that with something bad.

Speaker C: Yeah. Man, talk about the Man's Search for Meaning book by Victor Frankl.

Speaker A: Yeah.

Speaker C: Wonderful book.

Speaker A: Yeah.

Speaker C: Yeah. One of my proudest moments of my life was when I wrote one of my, I've written six books and I don't know which one I sent to my mom, but she called me, told me she was proud. It was a best moment of my life.

Speaker A: How cool is that? Yeah. As kids we all want our parents to be proud. Right. I mean, that's part of the, uh, the journey. And so like I said, I'm sure we've done a lot wrong. I'm very happy with how they turned out and most of that's due to my wife. But I give credit where credit's due, for sure.

Speaker C: Now let's talk about minority partners. How can you shake off a minority partner that you're disagreeing with?

Speaker A: Yeah. Assuming you don't have a buy sell in place, uh, the strategies are going to be pretty Similar. Right. You start with conversation and understand motivations and drive and all that. If the voting is pretty simple. Right. That you, as the majority owner, you can drive a transaction in a particular way. There are lots of legal ways that you can force them out.

Speaker C: Yeah. Squeeze out and so forth.

Speaker A: Yep. Merge the business into a new one

Speaker C: and depending on the state law, I believe. Right.

Speaker A: Yep, Yep. There's corporate law that's not optimal. Right. Because the amount of distraction that you're, you and the business are going to endure, pretty significant. And usually when you get that kind of distraction, business performance is going to erode. So that's why I would always start with communication and just understand, well, why do we have this disagreement? And, you know, is there a more productive way to do this than to inevitably, you know, force us into litigation? Because we're going to, you know, do a cram down on a minority owner.

Speaker C: That's a good point. You can always turn up the volume. You can always slowly crank it up. There's no sense cranking it up right to 10 right off the bat because then it's, it's really hard to turn it down later on.

Speaker A: Yeah. And, you know, we've certainly observed. Right. When you're in litigation, the lawyers do pretty well. Both parties are not going to do that well. And it's very emotionally draining. It's very distracting. And like I said, it's going to damage the business. So that's kind of the nuclear option that you really don't want to deploy unless you absolutely, positively have to.

Speaker C: And you may be able to come up with a lower number if it's a mutual, uh, agreement. Because if you squeeze a partner out, they're going to go get an appraisal. You're going to have to go through litigation, probably get to a second appraisal, maybe a third. I think that's depending on the state fair value or fair market value. There might be some different ways that that's valued where it might actually come out more than if you came to a mutual agreement. Uh, and that combined with litigation, your legal bills, and the distraction in the business, like you said, the mutual is the way to go. If you can't, then at the last option, go nuclear. But there's no sense going nuclear right off the bat.

Speaker A: No, no. I guess I think most of these things are just a lack of productive communication. And again, if you can't do it yourself, there are skilled people that can help you just have that more productive dialogue.

Speaker C: Any war stories that you want to share? When it comes to partners or family members and trying to get a deal done.

Speaker A: Yeah, we've seen a lot. And again, typically it's sometimes, uh, we've certainly seen instances where you might have two family members that are active in the business that are owners and two family members that are not active in the business, but are owners. And depending on how the parents may have set that arrangement up, they may all be getting a salary. Then you start to build in this resentment. Right. Because everybody's getting a salary, but only two of them are doing any work. The two that aren't doing any work. I think this can happen for a lot of the reasons we just talked about. Right. You know, if they feel like if they don't have that self worth, they're gonna likely that's gonna result in bad behavior, just, you know, as most insecurities do. And we've certainly seen, you know, families where people aren't talking to one another and. Which is sad. Right. And like I said, you know, I'm sure when the parents set everything up, that was not their intent. But it's very difficult when you layer on family dynamics on top of business dynamics. The odds of that going well are pretty low.

Speaker C: Chris, is there a vitamin or mineral? Is there a pill you can take to prevent these.

Speaker A: Yeah, A, uh, well structured buy sell, which really defines what happens if two partners can't agree. That not only sets the framework for how to resolve the conflict, typically those, if they're done well, will actually make the conversations that you need to have much easier to have. Because everybody knows what the result is if you go down the buy sell path. Right. I also think, and this is, you know, we talked about the comparison of a business partnership to a marriage. There are lots of things you can be doing as partners to get to continue to realign, realign, realign as you go. My old mentor used to call it sand in the gearbox, which is, you know, if we're taking a trip together and we get this little grain of sand in the gearbox, which, uh, over time, right at the beginning, it's not a big deal, it'll just kind of grind through it. But over time, if it's ignored, that little grain of sand will wear away so much of the, you know, the hub that that will stop. And as a result, it's kind of, I think if that is similar to the little disagreements that you might have as partners, make sure you address them, you're communicating about them, because again, all of those little things will build up and over time that that will create the uh, irreconcilable differences. And so, just like a good marriage, a good business partnership is going to involve a lot of communication, alignment and realignment, and just continue to have that. There's a couple of good books out there. Fierce Conversations is one where, yeah, here's how you have a conversation like that.

Speaker C: Yeah, that's a skill. You have to know how to have those conversations. You have to be able to do that. I just had one with my team. It was about an hour long. We do it once a month. We complete a document. It's got a series of questions. How happy are you? What's causing you stress? And every month a little sand builds up in that gearbox and we clean it out, and then the next month a little more. But what's interesting, though, is, as you have those conversations actually does build trust, and the relationship is actually strengthened through those conversations. And you build confidence knowing that if you encounter something in the future, that you're able to handle it, because you've handled so many of those conversations in the past.

Speaker A: I totally agree. Right. It starts with vulnerability. Right. You know, all of us have worries and concerns and vulnerabilities and issues, and the more open you can be, the more trust that builds. Right? And the more trust you build, the easier it is to have these hard conversations. Just like my mentor said, if you and I trust each other, we can talk about anything. Because I know you're trying to do the right thing and I'm trying to do the right thing. And it hopefully allows you to leverage the perspectives of both partners. You know, I. I had a partner in this business for a long time, still do. But I bought out most of his shares. And, you know, over the 15 or 17 years that we worked together, we had lots and lots of disagreements, but we. I think we both were pretty good at being vulnerable. We were both pretty good at acknowledging the other's perspective. And I would say nine and a half times out of 10, those conversations resulted in a much better decision because one of us had a blind spot.

Speaker C: Uh, absolutely. Yeah. The story is, if you go into the best boardrooms and like Silicon Valley, people are practically screaming at one another, being open. They're being fierce vulnerable at the end of those conversations, and they are fierce. You have a great decision because everyone is being a proponent for their decision, and you throw out all the information in the room. And at the end, though, you hug and make it up and, hey, got a good decision.

Speaker A: Yeah, to your point, it's just, hey, you have to develop those muscles, right? Of how to have that hard conversation and where it's not a personal attack. We're talking about the issue, Chris, as

Speaker C: we wrap up the show here. What do you think the takeaway is?

Speaker A: I think the underlying element that we've talked about, Jacob, is just the importance of communication. And to the extent that you, you know, as business partners, haven't had some training in how to communicate and how to have productive meetings, that's probably a great place to start. Because a lot of what we talked about is, you know, when the sand is fully stopped, the gearbox, right. And the car is done, you want to have these conversations well, well, well, before that ever happens. And so I think this is all about, as you said, the vitamin, which is all about regular candidates trust building conversations.

Speaker C: Clean out that sand in the gearbox. Chris, thanks again for joining us on the show. That's Chris Younger with Class 6 partners. We'll have his contact information in the show notes. And Chris, thanks again for joining us on the show.

Speaker B: M hm and A Talk is brought to you by Morgan and Westfield, a, uh, nationwide leader in mergers and acquisitions for small to mid market companies. If you've enjoyed this show, don't forget to subscribe and leave a review. Learn more@morganandwestfield.com While we take reasonable care to select recognized experts for our podcast, please note that each podcast presents the independent opinions of such experts only and not of Morgan and Westfield. We make no warranty, guarantee or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered legal, legal or professional advice.