Dealing With Partners When Buying A Business

Years ago, in one of the first businesses I purchased, there were two owners. I initially met the managing partner and he told me from the onset that he made “all the decisions”. Allegedly, the other owner was strictly a silent partner. We had several meetings and negotiations, and things were progressing smoothly.

I tabled an offer that reflected all the deal points we had agreed to. Then, the communications started to slow down drastically. I soon learned that the silent partner was not too silent after all. In fact, he was making his opinion loud and clear – he did not want to do the deal.

I managed to get the two partners back to the table although it was not that easy. They were doing a great job of playing “good cop-bad cop” and I had naively fallen for their routine.

It would have been easy for me to walk from the deal, but I am glad I decided to forge ahead. It turned out to be one of the best investments I ever made. However; getting to the finish line was a “hair pulling exercise”.

A lot was learned from the situation, and so if you find yourself in discussions where there is more than one owner, you will want to do the following:

• From the onset of discussions, find out how many owners there are in the company. Always make a habit of getting the company's most recent annual coprporate filings from the local state website just to double-check the company's ownership, the legal structure, and to make sure it is in "good standing".
• If any are either not active, or “silent”, you will want a clear understanding of the decision making process in the daily business operations, and also regarding the potential sale of the company.
• Ideally, if you will only be dealing with one party, you will want to get a letter from the other owner(s) confirming the other partner’s ability to make binding decisions. If they will not agree to this, then your discussions must involve all owners, at all times. If not, you will drive yourself crazy. One partner will agree, and the other will renegotiate. It will happen with every deal point because the partner who is not present will almost always feel he can get a better deal.
• Do not fall prey to the seller’s games. If they are going to play off each other in negotiations, and no point is ever really final, then do not commit yourself to any position until you know the position of both parties on the seller side of the deal.

Make Sure You Know What Each Partner Does

One critically important issue is to really drill down to determine what involvement, if any, each partner has in the business on a day-to-day basis. Far too often, a seller will dismiss the impact of their partner’s role, and you can really put yourself in a bad situation.

Even if one has a far lesser role, you need to know whether they plan on leaving the company after the sale as well. If that is the case, then you have to almost certainly adjust the Owner Benefits downwards to account for replacing the second partner’s function. No matter how smart you may be, and regardless of how minimal the sellers may represent one of the partner’s role, if they work in the business at all, you have to replace their function. If there is any cost for you to do so, that must be taken into account.

When Partners Are Fighting

The final point regarding partners is when you come across dealing with feuding ones. This can be a real mess. The points noted above are especially important but more so is that you may have to conduct simultaneous negotiations. I have seen it where the partners no longer talk to each other. You can imagine how much fun that scenario can be. While more time-consuming, if the business makes sense, you can certainly get these deals done. But, you must have each partner sign off (literally) on every deal point.

A word of caution: never get in the middle of their dispute. It does not serve any point. Keep your position and story consistent regardless of which one you are speaking to. If they cannot get along, that is their problem, do not fuel the fire. If the discussions get out of hand, tell them to resolve their issues first and then you will engage in the negotiations.

Want to learn more about buying a business? Make sure you visit my website - The Business Buyer Resource Center

Comments

[Leon Parker]

In situations where the owners of a business are married and getting a divorce the guidance in this article is imperative to follow. You must not only know what each role has been, but what each party is trying to get out of the situation, and what the legal situation is. If there is a court ordered sale there also may be a third party appointed by the court who has to be satisfied. Also frequently each party will be looking for any sign that you are favoring the other side, so you have to really work at neutrality.