By: Patrick Ungashick
If you share ownership of your company but personally have at least 50%, you are probably used to being in control. On issues like company strategy, money, and people, you have the final say. But what about when it comes to exiting from your company? For example, what if you want to sell the business, but one or more minority co-owners do not want to sell? Are you still in control? Probably not. Here’s why.
We routinely say in the U.S. “It’s a free country.” One freedom is the right to own property. Within this right generally, one person cannot force another person to part with property that he or she owns. If you don’t want to sell your car, home, or shares of Apple Computer stock, then nobody can make you. The same principle applies within your company. If you wish to exit by way of sale, but one or more minority co-owners don’t want to sell, typically you cannot make them sell their portion of your company. If a minority co-owner does not want to sell, then you might not be able to sell either. Most buyers will not want to acquire your majority interest in the company if the purchase comes with one or more unknown minority partners, especially people opposed to the sale. Practically speaking, minority co-owners can veto a sale, leaving you not in control of your own exit.
This reality often comes as an unwelcome surprise to majority owners seeking to exit. Some owners only learn their minority partners can block a sale when a potential buyer is standing in the doorway. Should this occur, your only options are trying to talk your minority partners out of their objections, offering to buy them out at an even higher price, or seeking legal action if you and your lawyers can find sufficient grounds. None of these are attractive options. The company sale would be in jeopardy, and the relationship with your co-owners may suffer irreparable harm.
To regain control over your exit, and to avoid a future impasse with your co-owners, take the following two important steps:
Step One: Talk About Exit – Now
Many business co-owners do not have open, detailed conversations about their business exit goals and plans. It’s not hard to see why. The company keeps you busy, and planning for exit may not be on the priority list for most days. But co-owners cannot afford to wait to have these necessary conversations to determine if their exit goals are in alignment or in conflict. The more time you give yourselves to work out any exit goal misalignment, the more options you have. Also, you never know when a buyer might come along—if you wait until a buyer is standing there to have your first exit conversations, it will be too late.
To help co-owners get started, download our free eBook called The Guide to Creating Co-Owner Alignment.
Step Two: Put It in Writing – Now
Once co-owners start having the difficult but necessary exit conversations, they discover the advantages of implementing written agreements that govern how ownership may change hands, such as upon the sale of the company. One common type is a buy-sell agreement. Buy-sell agreements are legal documents that identify situations where ownership in the company may change hands and provide instructions on how each situation is to be handled. The most familiar example is what happens upon the death of a co-owner. A buy-sell agreement usually requires the deceased owner’s heirs to sell the interest back to the company or the surviving owner(s) and at a specified price. This protects everybody: the deceased owner’s heirs receive a cash payout while the remaining owner(s) move forward without unwanted business partners.
Buy-sell agreements nearly always address the death scenario, and most address other contingencies such as if a co-owner becomes seriously ill or disabled. However, few buy-sell agreements govern how co-owners must handle an offer to sell the entire company. This omission leaves business co-owners at risk. To fill in the gaps, ask your legal advisors about including “drag-along” and “tag-along” rights within your buy-sell agreement. These odd-sounding provisions bind co-owners together when selling the business to an outside buyer. The “drag-along” part requires that if the majority co-owner sells his or her stake in the business, the minority co-owners are required to join the deal.
To fill in the gaps, ask your legal advisors about including both “drag-along” and “tag-along” rights within your buy-sell agreement.
This protects majority co-owners against minority co-owners holding up a sale. “Tag-along” is the reverse—the majority co-owner cannot sell his or her stake without the minority owners tagging along and being included at the same price and terms. This protects minority co-owners from being left out of any deal. Together, these provisions bind all the co-owners into a single block and restore the majority owner’s control over the decision to sell the entire business.
Making sure you are in control of your own exit is critically important. At NAVIX, our clients – even those who share ownership of their company — are prepared for multiple exit scenarios, and NAVIX works with our clients to ensure they have agreements in place to mitigate against one minority owner holding up a sale. To learn more about these exit planning steps, contact us to schedule a complimentary, confidential consultation with one of our independent NAVIX Consultants.