Successful private company owners often share the characteristics of vision, passion and strong purpose. That does not mean that they run their companies without any conflicts with their minority partners. In fact, it is common for business partners to have different views about the company and its growth plans, because there are different ways to successfully grow a business, and when challenges arise, the best way is not always clear. When the majority owner has serious disagreements with a minority business partner, the question the owner must answer is whether it is time to say goodbye. This post offers some ideas to answer that question for most owners.
Is there a business definition?
The first question that most business owners have to answer when they have serious conflicts with their business partners is whether it is possible to secure the redemption (exit) of the minority partners in the business. In other words, does the majority owner have the right to remove a non-performing business partner from the company? This legal mechanism exists when the majority owner has a purchase agreement or other mechanism that allows for the redemption of the minority partners’ shares in the company.
When minority partners join the business, it’s always a good idea to create a partner exit plan so that if things go south, the majority owner has the right to redeem. In the absence of such a contractual right, the majority partner may not be able to secure the exit of the minority shareholder without mutual consent. There are limited circumstances in which most owners can create new rights to protect the exit of a non-performing minority partner, but this requires a detailed review by legal counsel of the company’s governing documents and other agreements between the owners.
Describing the nature of the dispute
When businesses are on a successful path, they are proactive, innovative, and bold in taking on challenges. They are involved in group activity leaders. The company may have a dynamic leader, but he or she wants to be surrounded by bright colleagues who offer new ideas and act as an echo chamber for many of the owners. It is common for leaders to have disagreements in this environment, and their efforts to build consensus are healthy and important.
Disagreements between business partners do not work when one of the minority owners or a small group does not work for this common goal and instead pursues a different agenda that maximizes their own importance. In this case, the company is divided against the vision of the business plan, factions are built between employees, which leads to internal conflict that slows down the growth of the company or, in the worst case, completely disrupts the company’s activities. Success.
A question that a majority owner must quickly address is whether disagreements with a minority business partner reflect differences in approach, style, or strategy, but are still consistent with the company’s desire to thrive. If so, perhaps aspects of the minority partner’s views can be included in the business plan. But if the minority partner is clearly ego-driven, if the partner does not support the group’s decisions, if the partner demands distributions and refuses to reinvest in the business, and finally if this partner acts out. If the ideas are not accepted, which weakens the company, this partner’s continued involvement will drag on the company, which will become more urgent with time. When this conclusion is reached, the majority owner must take decisive action to seek a separation from the minority partner that preserves the company’s culture and vision.
Pricing process
As discussed above, redemption of a minority partner is possible only if the majority owner can exercise a purchase agreement or has similar redemption rights in the company’s governing documents. During the purchase process, most owners want to pay close attention to the appraisal process, and to calculating the amount of money to be paid to the minority partner’s interest. The formula used to determine the purchase price is set out in the purchase agreement or administrative document.
In most cases, the formula for determining the purchase price of a minority interest states that the price will be discounted based on the lack of control and marketability of the minority interest. Even if the formula does not show that these discounts apply, unless they are specifically excluded, most owners will want to insist that their value be subject to these discounts because they are valuable and supported by Texas statutory authority and traditional appraisal. Practice.
Conclusion
Whether a majority owner can act to ensure the exit of a business partner with a minority stake in the business is a difficult decision. Before going this route, the majority owner must first ensure that: (1) he has the right to redeem the partner by written agreement and (2) the nature of the dispute with the partner is sufficient. To guarantee to take this important step. Finally, after the decision has been made to redeem the minority partner, the majority owner will want to monitor the appraisal process to ensure that the purchase price paid for the minority interest comps is consistent with industry standards and includes all applicable minority concessions.