March 25, 2021

Partners Forever! What to Do Once 50-50 Owners No Longer Get Along.

By: John K. Lane, CEO/Managing Director, Inglewood Associates LLC

As a turnaround professional, I have been called in many times to “fix” situations where two 50-50 owners were at each other’s throats and I thought that it might be helpful to share some thoughts regarding these difficult circumstances.

It all goes back to the heady, euphoric times when two life-long friends (also insert here “siblings”, “parent/child”, “husband/wife”, and so on) decide to launch a new venture.  Since there are two partners, and the math is easy, you end up with 50-50 owners.  Of course, how could that ever become an issue?  The partners trust each other with their lives and likely love each other or are incredibly dear friends.  Maybe there is a formal shareholder agreement, perhaps not.

Working together the partners overcome obstacles, fight off the competition, and generally operate in a give and take manner for the mutual benefit of the team.  The business starts to pick up steam, developing a niche for itself and a loyal customer base.  The 50-50 owners celebrate their successes and complement each other’s contributions.  All is good.

Then, life happens.

Sometimes the start of the troubles arises from minor periodic irritating behaviors that compound over a few years.  Sometimes they arise from a specific event or decision, such as the hiring of one partner’s off-spring who suffers a watered-down work-ethic gene, a partner’s divorce/remarriage, a business decision that went wrong or perhaps a partner’s questionable habit(s).  Sometimes, after many years of successes, 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.  At this point, every decision made by the other partner, decisions that are good or bad, material or picayune, are questioned.  Soon, the allegations are asserted and the 50-50 owners have their hands wrapped tightly around each other’s throats.

At this emotional moment, the last thing that either of the 50-50 owners are thinking about is the company’s welfare, or their own ultimate personal financial welfare.  They are each aggrieved and they each just need someone to come in and make the other partner pay for their extensive, nay criminal, wrong doings.  Everyone will clearly see who is to blame here!  Of course, this is simply the road to perdition.

At this point, the 50-50 owners need instead to be focused exclusively on two things:

  1. Preserve the business and its value – If the partners want to make this a fight to the death, they will get their wish – they will receive nothing for their many years of hard work. So, they need to figure out how to, at the very least, stop damaging the business.  Simply maintaining status quo can be a very good thing.
  2. Determine how to separate their business interests – They are just not going to resolve their problems and the former life-long friends need to take separate paths. The mounting assertions of wrong doing must be put aside and interim ground rules should be set forth.  While it is best to be avoided, but sometimes a receiver or independent person should be appointed to provide some adult supervision.

There are several approaches to separating the business, but they most all, by definition, require someone to sell their interest.  In some larger companies with more than one division, there may be an opportunity for each party to take a portion of the business.  However, equalizing the transaction will be a challenge and the risks of each partner trying to poach in the other’s market are great.

Sometimes the entire business can be sold, but be aware, the potential buyer will know that they are buying damaged goods for a likely damaged price.  A higher price might be obtained in some situations where one partner buys the other out, perhaps over time if the funds and/or cash flows are not there. 

Of course, if trust no longer remains, then valuation will be problematic.  To resolve this issue, one or more appraisers can be hired to determine value.  Alternatively, each of the partners may submit sealed or open bids in a private auction setting.  One approach may be that one partner has the opportunity to set the price and the other partner has the choice to buy or sell at that price.

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

As a final note, when the partners finally reach out for help, the business is generally already significantly damaged, value lost.  One may ask if there is something that can be done early, perhaps in the beginning to lessen the damage to the business and to their relationship.  And, there is.

As defined by Ohio Revised Code 1701.911, there is a concept of a Provisional Director that can be utilized as a tie breaker when the company’s board of directors are split on a critical issue (e.g., the 50-50 owners).  ORC 1701.911 refers to situations where the State Court can be petitioned to appoint a Provisional Director, which in of itself a likely less costly option than having a receiver appointed.  However, when used in conjunction with ORC 1701.56 Number and Qualification of Directors – Provisional Director, this provides the owners the ability to appoint a Provisional Director early on and “just in case” there are disputes down the road.

Certainly, there will be some level of cost to retain a Provisional Director and keep them apprised of the status of business operation, however, those costs would likely pale in comparison to the cost of the damage that battling owners could do to the business.  Candidates for this position would be any trusted advisor including the company’s outside accountant, business advisor or, given that at the time of need the company may be in some distress, a turnaround professional.  The key here is to make sure that the person selected always remains impartial.

Now, I understand that when two partners are joining forces to start a business, one of the last things that they are going to think about is how to resolve a problem that they think could never exist.  However, partner disputes WILL severely damage the value of the business and an ounce of precaution may be called for at the formation of the business.  Perhaps if there was a trusted advisor whispering this concept in the partners’ ears at the start of the business, then perhaps my services to come in and “fix” things might not be needed.