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Recently I’ve worked with two businesses where there has been a significant imbalance in the amount of effort being directed in the business by the owners. In both cases the businesses were owned by the founding shareholders. And in both cases, one partner was committed to continuing to manage and grow the business, whereas the other partner was more committed to golfing. In part this is a result of boomers having differing ambitions for retirement. Often, both partners earn prorata incomes based on their percentage of ownership. As anyone can imagine, this leaves some partners feeling animosity or resentment and can lead to turmoil within the business. So, what can a partner do to resolve the imbalance?
First of all, dust off the shareholders agreement that you signed and look at the provisions set out that may have been established to resolve these disputes. Second, approach your partner to discuss what you feel the imbalances are in relation to each partner’s contributions to the business. Open discussion may resolve these issues by increasing effort or changing the compensation model. For some business owners, this open dialogue may lead to a discussion over succession.
When it comes to partner buy outs, one of the most common questions relates to share valuation. Sometimes this is predefined in the shareholders agreement. If it isn’t (or if the pricing mechanism is unrealistic) it may help to engage an independent third party to set an enterprise value. Note: there are no rules of thumb that cover every industry. But remember, that a valuation must have been born out of the reality that one partner has to come up with the money to buy the other out. Structuring a transaction that can be financed is often where transactions get stalled.
Owner managers are often in the best place to purchase the remaining shares of a business. They understand the business, have been actively involved in the success to date and there is less risk of management change. This often appeals to lenders or investors that would assist in the financing of a purchase transaction. Sometimes it requires creative structuring to complete the transaction and if the exiting partner really wants out, they may need to accept an earn-out or vendor take back.
As a final point, to act as devil’s advocate, there are situations where your partner adds as much value to the business as you do, even by investing half the time or not being physically present. Sometimes those partners hold the crucial customer relationships or they are responsible for the successful strategic plan the company has implemented. In the digital age, time and physical presence are not the only measurements of value added to a company.
For more information please feel free to contact myself, Peter Kinkaide, or your local MNP advisor.
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