Partners Forever: What to Do When 50-50 Owners No Longer Get Along

By John K. Lane, CEO, Inglewood

As a turnaround professional, I have been called in many times to “fix” situations where two 50-50 owners are at each other’s throats. Because 50-50 business partner disputes follow such a predictable arc, I thought it might help to share some thoughts on how to navigate these difficult circumstances before the damage becomes permanent.

How Two Trusting Partners Become Two Combatants

It all goes back to the heady, euphoric days when two life-long friends decide to launch a new venture. (You can just as easily insert “siblings,” “parent and child,” or “husband and wife” here.) There are two partners, the math is easy, and you end up with 50-50 owners. How could that ever become an issue? The partners trust each other with their lives and are likely dear friends or family. Maybe there is a formal shareholder agreement, perhaps not.

Working together, the partners overcome obstacles, fight off the competition, and operate in a give-and-take manner for the mutual benefit of the team. The business picks up steam, developing a niche and a loyal customer base. The owners celebrate their successes and compliment each other’s contributions. All is good.

Then life happens.

Sometimes the trouble starts with minor, periodic irritations that compound over a few years. Sometimes it arises from a single event or decision: the hiring of one partner’s offspring who suffers from a watered-down work-ethic gene, a partner’s divorce or remarriage, a business decision that went wrong, or a partner’s questionable habits. Sometimes, after many years of success, one partner starts to come to “work” in name only.

For whatever reason, the pressures and hard feelings build up, and the ability of the 50-50 owners to operate as partners vanishes. Now every decision the other partner makes, good or bad, material or picayune, is questioned. Soon the allegations fly, and the owners have their hands wrapped tightly around each other’s throats.

Stop Fighting the War You Cannot Win

At this emotional moment, the last thing on either partner’s mind is the company’s welfare, or even their own ultimate financial welfare. Each one is aggrieved, and each just needs someone to come in and make the other partner pay for their extensive, nay criminal, wrongdoing. Everyone will clearly see who is to blame. Of course, this is simply the road to perdition.

Instead, the owners need to focus exclusively on two things.

• Preserve the business and its value. If the partners want a fight to the death, they will get their wish, and they will receive nothing for their many years of hard work. So they need to figure out how, at the very least, to stop damaging the business. Simply maintaining the status quo can be a very good thing. This is the moment where disciplined turnaround consulting earns its keep, by taking the emotion out of day-to-day decisions.
• Determine how to separate their business interests. They are not going to resolve their differences, and the former life-long friends need to take separate paths. The mounting assertions of wrongdoing must be set aside and interim ground rules established. While it is best avoided, sometimes a receiver or independent party should be appointed to provide some adult supervision.

Ways to Separate the Business

There are several approaches to separating the business, but nearly all of them require someone to sell their interest. In larger companies with more than one division, there may be an opportunity for each party to take a portion of the business. Even then, equalizing the transaction is a challenge, and the risk of each partner poaching in the other’s market is great.

Sometimes the entire business can be sold, but be aware: a potential buyer will know they are buying damaged goods at a likely damaged price. A higher price might be obtained where one partner buys the other out, perhaps over time if the funds or cash flows are not immediately there. Thinking through these options in advance is exactly what good exit and sale preparation is designed to do.

Of course, once trust is gone, valuation becomes problematic. To resolve that, one or more appraisers can be hired to determine value, and an independent business valuation can give both sides a defensible number to work from. Alternatively, each partner may submit sealed or open bids in a private auction. Another approach: one partner sets the price, and the other has the choice to buy or sell at that price.

In each case, the ultimate goal is to separate the combatants and let them return to a “normal” life. Life is too short to continue under that kind of duress. The longer-term, and perhaps wistful, goal is for the two partners to eventually repair their relationship, something especially important when they are relatives.

An Ounce of Prevention: The Provisional Director

Here is the hard truth. By the time partners finally reach out for help, the business is generally damaged and value is already lost. One might ask whether something can be done early, perhaps at the very beginning, to lessen the harm to both the business and the relationship. There is.

Under Ohio Revised Code 1701.911, there is a concept of a Provisional Director who can serve as a tie breaker when a company’s board is split on a critical issue, exactly the situation of 50-50 owners. ORC 1701.911 allows the State Court to be petitioned to appoint a Provisional Director, which is itself a likely less costly option than having a receiver appointed. Used in conjunction with ORC 1701.56, Number and Qualification of Directors – Provisional Director, this gives the owners the ability to appoint a Provisional Director early on, “just in case” disputes arise down the road.

There will be some cost to retain a Provisional Director and keep them apprised of business operations, but those costs would likely pale in comparison to the damage battling owners can do. Candidates for the role include any trusted advisor: the company’s outside accountant, a business advisor, or, since the company may already be in some distress by the time of need, a turnaround professional. The key is to make sure the person selected always remains impartial.

I understand that when two partners join forces to start a business, one of the last things on their minds is how to resolve a problem they believe could never exist. But partner disputes WILL severely damage the value of the business, and an ounce of precaution may be called for at formation. Perhaps if a trusted advisor had whispered this concept in the partners’ ears at the start, my services to come in and “fix” things would not be needed at all.