Selling PART of a Business
Selling part of a business is not something we see often but it is not uncommon – both in early stage businesses and more mature enterprises.
When a business has multiple founders, it is not unusual to for one partner to come to the realization that business ownership – and the responsibilities that come with it – is just not for them. When this happens, things can get a little dicey around the office, shop or plant as the owners’ relationship becomes frayed.
The danger in this case is that the business suffers as the owners’ relationship worsens and the ability to work together becomes more and more untenable. To avoid a calamitous outcome, a solution must be found to either establish a peaceful environment until a resolution is reached or to enable the disaffected partner(s) to leave.
But for one or more partners to leave, there are challenges the remaining partners must overcome.
Finding a Buyer
Selling part of a business means finding someone that wants ONLY part of a business. This can be one of the many challenges selling part of a business entails insofar as someone that will consider buying a portion of the business will be concerned about any number of potential issues. Consider the following:
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- How much control will the new partner have – versus how much he or she will want – and how, and over what period of time, will that control vest?
- If there are two original partners each owning 50%, will the remaining partner want a new 50% partner who he or she may not know?
- Does the remaining partner have any control over who buys the exiting partner’s share?
- Can the partners agree on a value for the business and, thus, the share being sold?
- Do the remaining partners have a first right of refusal to purchase the exiting partner’s share?
In many of the cases we’ve seen, the founders did not get good legal advice when establishing the business and these questions and issues arise only when the relationship is in the toilet; a bad time to start negotiating an exit!
I’ve written previously about buying a part of a business – i.e. from the buyer’s view – but never directly about selling part of a business; the view of the remaining partner(s). If the exiting partner wants out, the biggest question he or she is likely to have is how much is their share of the business worth. But the remaining partner(s), though certainly concerned about the value of the exiting partner’s share, have much more to concern themselves with.
For example, will they be able to find someone that will be able to acclimate to the environment and personality of the business; someone they can get along with and that will fit into the business’ culture?
A logical solution is for the business or the remaining partners to buy out the exiting partner. Can the partners – remaining and exiting – agree to how the business will be valued? What if the business and the remaining partners don’t have adequate capital to buy the exiting partner out by writing a check? Can the parties agree on how the exiting partner’s share would be paid for?
Are there any restrictions on the exiting partner’s ability to sell? There better be! The remaining partners are unlikely to want a competitor to be their new partner!
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The Bottom Line
There is a ton of issues to consider when one partner wants out of a business partnership. Had the founders sought the advice from a qualified attorney or business consultant, most of these issues should have been anticipated and planned for at the START of the business. Unfortunately, that doesn’t always happen.
A couple of college friends get together – say Zuckerberg and Winklevoss – come up with a social media idea they name FacePlant and launch it from their dorm rooms. A disagreement arises and the partners have a falling out. For a FacePlant, a MicroSoftener or the local bagel shop, not anticipating such a possibility could have catastrophic consequences for all involved.
Some of these concern arise when selling ANY business with multiple owners. If you’re a business broker, you have to be able to tell up front if you’re about to deal with a situation like this.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!