When you co-own a business, you likely don’t go into it thinking, “One day, we may loathe each other.” But over time, goals, ambitions, and the economy itself can change, creating strife among co-owners. And it becomes hard, if not impossible, to solve major disagreements when you’re in the midst of a disagreement with co-owners.
Today, we’ll look at a process that can help you prepare yourself, your co-owners, and your business for potential disagreements.
1. Get Out In Front Of It
The best time to plan for how you’ll approach a major disagreement is before you have the disagreement.
For example, say you equally co-own a business with two other partners. You have the same general goals and ideas for what you want the business to achieve.
This is a good time to begin planning for events that may cause disagreements in the future. When you’re all on the same page, it can be easier to remain clear-headed about disagreements that could crop up.
For instance, you might propose a scenario where a co-owner wants to cash out of the business early to start their own business. You and your Advisor Team can begin to lay ground rules for what that might look like, such as inserting a non-compete provision in your Buy-Sell Agreement.
The goal of staying ahead of a potential dispute is to make such decisions while you’re in a collaborative mind-set. You don’t have to try to solve every single disagreement you may have.
2. Keep Your Buy-Sell Agreement Current
When disagreements arise among co-owners, a common strategy is a buyout. In some cases, your Buy-Sell Agreement may state the conditions of a buyout, such as a Texas Shootout provision.
In a Texas Shootout provision, one co-owner may offer to buy out another co-owner. If the second refuses the buyout, then the second co-owner must offer to buy out the first co-owner at the same price, terms, and conditions of the original offer, with the goal of leaving just one co-owner in charge.
However, an outdated Buy-Sell Agreement can cause all sorts of issues with such a scenario. Inapplicable business valuations, a change in financial security requirements, and countless other calculations could cause issues.
Keeping your Buy-Sell Agreement current could help make implementing a solution for a co-ownership disagreement run more smoothly (e.g., less litigation).
3. If All Else Fails, You May Need To Cut Bait And Start Over
In some cases, when a co-ownership situation is untenable and no one is willing to work toward a solution, business dissolution could be an option.
For many business owners, this solution is unthinkable, especially if the business has grown in value over the years. It can be time consuming, expensive, and make achieving your financial goals much more challenging.
While this option is generally a last resort, it’s not always a necessity. With proper planning, you can better position yourself to avoid reaching this worst-case scenario.
Addressing disagreements among co-owners is generally easier if you plan for them before they reach the boiling point. It may even be possible to position yourself to engage co-owners on disagreements with help from a professional and objective Advisor Team. However, as with implementing solutions to disagreements, it’s generally easier to do so through proactive planning than reactive actions.
We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.