Experience teaches us that all relationships have ups and downs, including those existing between business partners.  When the relationship becomes strained between partners in a private company, however, the majority owner of the business must decide whether these problems are fixable, or whether the best decision is to remove the partner who holds a minority ownership stake in the company.  This is Part 1 of 2 posts, and it focuses on identifying some of the most common characteristics of difficult business partners.  When these vexing attributes exist in a business partner with a minority ownership interest in the company, the majority owner needs to consider whether to buy out the partner’s stake, or at least end his/her involvement in the day-to-day operations of the company.  In Part 2, we will discuss the process for the company’s majority owner to remove a difficult partner from the business, and we will also look at strategies that enable minority investors to exit the business and secure a buyout of their ownership interest in the company when serious conflicts arise with the majority owner.

Prevent Conflicts Before They Happen

The best way to avoid becoming involved in a dysfunctional business relationship in a private company is not to go into business with a difficult business partner.  This may sound like a high bar to overcome because it is hard to accurately predict how a relationship with a new business partner will ultimately pan out.  But, there are concrete steps potential business partners can take before they go into business together to determine if they are likely to be a good match when they join forces in managing and building a private company.

First, the potential partners can hire an experienced business coach who can evaluate their value systems, their approach to business issues, and how they handle conflicts that arise in the business.  The coach can then provide them with a recommendation as to whether they appear to be compatible or whether there are major differences between them, which may lead to conflicts in the future.  Second, the partners can also take available/standardized tests, which will provide an overview of their personality types and traits that help them to assess if they likely to gibe in working together.  Finally, the partners can work together on a detailed business plan for the company that covers the following items:  (i) their job titles and duties, (ii) how the company will be financed, managed, and marketed and (iii) how they will handle the exit of a partner from the business in the future.   The way the partners work through this business plan may confirm that they are compatible or it may highlight significant personality conflicts and/or differences in their values, which raise red flags as to whether they would work well together as partners.

This type of pre-planning requires time and money, but is worth the effort and expense, because it will help avoid a potentially disruptive and public legal fight over a partner’s future exit from the business.  Further, and discussed in Part 2, before business partners start, purchase or invest together in a private company, they should negotiate and adopt a buy-sell agreement or other form of a detailed, written partner exit plan.
Continue Reading When to Pull The Plug: Is It Time to Say Goodbye to Your Business Partner? (Part 1)

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It is common for private company co-owners to have disagreements while they operate their business, but they typically work through these disputes themselves.  In those rare instances where conflicts escalate and legal action is required, business partners have two options—filing a lawsuit or participating in an arbitration proceeding.  Arbitration is available, however, only if the parties agreed in advance to arbitrate their disputes.  Therefore, before business partners enter into a buy-sell contact or join other agreements with their co-owners, they will want to consider both the pros and the cons of arbitration.  This post offers input for private company owners and investors to help them decide whether litigation or arbitration provides them with the best forum in which to resolve future disputes with their business partners.

Arbitration is often touted as a faster and less expensive alternative to litigation with the additional benefit of resulting in a final award that is not subject to appeal.  These attributes may not be realized in arbitration, however, and there are other important factors involved, which also merit consideration.  At the outset, it is important to emphasize that arbitrations are created by contract, and parties can therefore custom design the arbitration to be conducted in a manner that meets their specific needs.  The critical factors to be considered are: (i) speed—how important is a quick resolution to the dispute, (ii) confidentiality—how desirable is privacy in resolving the claims, (iii) scope—how broad are the claims to be resolved, (iv) expense—how important is it to limit costs, and (v) finality—is securing a final result more desirable than preserving the right to appeal an adverse decision.
Continue Reading Feuding Business Partners in Private Companies: Considering Arbitration to Resolve Partnership Disputes

The legal front remains forbidding for private company minority investors who seek to secure a buyout of their ownership stake based on claims for oppression against the company’s majority owners.  It has been six years since the Texas Supreme Court eliminated a court-ordered buyout as an available remedy for minority shareholders claiming oppression, and no other legal avenue exists that provides minority owners with a buyout of their interest based on claims for mistreatment by business owners who manage the company.  See Ritchie v. Rupe.[1]  The best advice for minority investors therefore is simply this—before investing in a private business, minority owners need to insist on securing a buy-sell agreement.

We have written extensively about the terms of buy-sell agreements in previous posts (Read Here).  A buy-sell contract provides investors with the right to obtain a buyout of their minority ownership interest in the company at a future time.

No BuyOut For Breach of Fiduciary Duty

When minority owners have claims for misconduct by majority owners, these claims most commonly include: (1) breach of contract, (2) fraud, and (3) breach of fiduciary duty.  None of these claims permit the trial court, however, to award the minority owner with the remedy of a buyout of his/her or its minority interest.  Instead, the remedy for these claims is typically the recovery of actual damages.  In the case of fraud, if the minority owner can prove that he/she was fraudulently induced to make the investment in the company, the court could rescind the transaction and require the majority owner to return the investor’s purchase price.  Instances of outright fraudulent inducement are relatively rare, however, and this will not be a claim or remedy available to most investors.  The fiduciary duty claim against the majority owner in control of the company does give rise to a potential shareholder derivative action, however, which is discussed below.
Continue Reading The Plight of Oppressed Private Company Minority Investors:  No Legal Escape Available Without a Buy-Sell Agreement in Place

In February 2009, Pittsburgh Steelers wide receiver Santonio Holmes made a toe tapping catch in the back corner of the end zone[1] to secure a thrilling, come-from-behind win and crush the hearts of Arizona Cardinals fans in Super Bowl 43.  For private company owners running their own firms, the boundaries for their conduct are

According to the financial press, private equity investors are holding huge sums waiting for the right private company in which to invest.  In late March, CNBC reported that private equity firms have a staggering $1.5 trillion in cash on hand (more than double the amount from five years ago) and that they are actively seeking deals in the travel, entertainment and energy industries.   In April, Vanity Fair stated that in each of the past four years, private equity managers have raised more then $500 billion for investment, and noted that from 2013 to 2018, more private equity deals took place than in any five year time frame in American history.

Private equity firms are not the only ones who are making investments in private companies.  Angel investors and others are stepping up to fund privately held businesses, and there are many documented success stories of individual investors who have struck platinum with their private company investments.   It is is also true, however, that a sizable number of fast growing private companies hit the rocks and burned through all or most of the funds that were invested in them.

The purpose of this blog post is not to help pick private company winners—that is a topic for others with the ability to discern which companies have the best ideas, management teams and the staying power to succeed on a long-term basis.  But picking a successful private company is only part of the story.   A private company’s success will not automatically make an investment in the business a success if the company’s governance documents do not provide the investor with a measure of protection on several important fronts.  This blog post therefore focuses on the critical terms that an investor will want to secure in the company’s governance documents before actually making a substantial investment in the company.
Continue Reading Looking Past the Face of the Shiny Penny: Check the Fine Print of All Private Company Investments

There are many reasons for business owners to consider adding new partners, including to secure additional capital, to add needed expertise to help grow the company, to bring family members or close friends to join in building the business and to put a succession plan in place. Adding new partners can therefore provide a boost to the company’s revenues, lighten the load carried by the founder, and put the business on course for long-term success.  But this decision is not without risk because the new business partners may create conflicts, disrupt the business and insist on making changes that put the company’s existence in peril.

If after carefully weighing the pros and cons, business owners decide to move forward in adding new partners, this post reviews important steps they can take to protect themselves and the business from the decisions and actions of these new stakeholders in the company.

Equity Ownership Can Be Conditional or Subject to Cancellation

One protective step business owners can take when adding a new partner is to make the addition of a new partner’s ownership conditional or subject to cancellation. This approach permits the owner to wait to grant the ownership interest in the company to the new partner until he or she has met specified business goals by a certain date or to cancel the grant of equity to the new partner if the specific goals have not been achieved by the agreed date.
Continue Reading Keeping Eyes Wide Open When New Members Join the Pack: A Cautious Approach to the Addition of New Business Partners

L to R: Tom Bronson, Ladd Hirsch

Recently I had the pleasure of sitting down for a virtual interview with my friend, Tom Bronson, as part of his Mastery Partners webcast series.   Tom has a wealth of experience helping business owners prepare to sell their companies, and we visited about how

“Adversity does not build character, it reveals it.”

James Lane Allen, Novelist, 1849-1925

The sudden onset of the Coronavirus has required private company business partners to confront unprecedented challenges.  In some cases, the partners’ actions in dealing with the Pandemic have led to conflicts revealing incompatible views between them in how to operate the business in a time of crisis.  As a result, the partners may want to engage in a Business Divorce after the virus subsides, but separating one or more business partners from the company is not likely to be simple or smooth if they have not already put a buy-sell agreement in place.  Fortunately, the absence of a current buy-sell agreement is not an insurmountable hurdle if the partners will take the time to negotiate and adopt a mutually beneficial partner exit plan.  Reaching agreement on a buy-sell agreement is a critical step for business partners to avoid a prolonged and expensive conflict that will be both disruptive to the company and also potentially destructive to their personal relationship.

This post discusses the key factors that both majority owners and minority investors will want to consider in negotiating a mutually acceptable buy-sell agreement that allows for partners to depart the business on amicable terms in the future.

The Trigger Point

The first question business partners will need to address is when the buy-sell agreement can be triggered.  To be fair to both sides, the parties will both want the right to trigger a buyout or redemption.  From the majority owner’s perspective, he or she may not want to be required to remain in business with the minority investor.  The majority owner will therefore want to secure a “redemption right” to repurchase the investor’s ownership interest at some point.  By the same token, the minority investor will not want to be stuck holding an illiquid, unmarketable interest in the company with no exit right.  The minority investor will therefore want to ensure to obtain a “put right” that enables the investor to secure a buyout from the majority owner and the right to monetize the investor’s ownership interest in the company.
Continue Reading Time for A Buy/Sell Agreement? Private Company Owners May Need to Put a Partner Exit Plan in Place

“You can’t always get what you want
But if you try sometimes, well, you might find
You get what you need”

You Can’t Always Get What You Want, The Rolling Stones

In addition to Mick Jagger’s legendary performances on stage and vinyl, the song lyrics of The Rolling Stones reflect wisdom that often goes unappreciated. This post focuses on issues that arise when spouses divide their private company ownership interests in the context of family divorce proceedings. When the private company ownership stakes held by the couple are highly valued, there is a potential for a win-win property division and settlement in the best interests of both spouses. You Can’t Always Get What You Want therefore aptly describes the prospects of negotiating a successful Business Divorce in a marital divorce action.
Continue Reading Family Law: Getting What You Need in Divorce—When It Isn’t Possible to Get All That You Want

Next to physical survival, the greatest need of a human being is psychological survival—to be understood, to be validated,
to be appreciated.

William Covey, 7 Habits of Highly Effective People
____________________________________

The deepest principle of human nature is a craving
to be appreciated.

William James, American Psychologist and Philosopher

The new year has started and private company owners are ramping up business plans for 2020.  Their focus is on specific key targets—adding customers, building new lines of business, developing more efficient ways to produce their products or deliver their services and cutting costs without hurting quality.   These business plans are driven by financial concerns with the ultimate goal of making the business more profitable in the year ahead.

While profitability is a critical measure of business success, as we launch into this new year, we want to challenge our audience of private company entrepreneurs, investors, officers, directors, managers, and advisors to rethink their approach to achieving profits.  Consider the potential outcome from elevating the appreciation felt by all company stakeholders, which goes beyond elevating the company’s balance sheet.  The important role of appreciation in business is described in a blog post titled, The Value of Gratitude as a Business Strategy:

“Gratitude is something that we don’t normally think of as a business fundamental. With lean operations and the focus on the bottom line, most organizations don’t take the time to weave gratitude and appreciation into their business strategies.  But without gratitude, teams begin to break down, clients stop returning, morale takes a turn for the worse, and your business partners will start to lean away.” (Read)

How Should Appreciation Be Defined

As a starting point, appreciation in the business context is defined as the increase in the value of assets over time.   Appreciation can also be viewed, however, as critical component of a powerful company culture.  In the workplace, appreciation is a powerful motivator:

“. . . evidence suggests that gratitude and appreciation contribute to the kind of workplace environments where employees actually want to come to work and don’t feel like cogs in a machine.” (Read)
“Feeling genuinely appreciated lifts people up. At the most basic level, it makes us feel safe, which is what frees us to do our best work. It’s also energizing. When our value feels at risk, as it so often does, that worry becomes preoccupying, which drains and diverts our energy from creating value.”  (Read)

Focusing on the role of appreciation in business is not a concept that should struggle to find a place in modern company culture.  In her article in Forbes in 2018, Kelly Siegel points to research showing that “focusing on gratitude is said to lower blood pressure, improve your sleep, reduce depressions and anxiety and help prevent substance abuse.”  Turning to the business world, she stated:

“A culture of gratitude in the workplace is just as critical in personal practice.  It can drive productivity, employee retention, wellness and engagement.  Instituting gratitude at work is something anyone can do, from front-line team members to the CEO.  Gratitude is viral, once people see appreciation catching, they are likely to jump in an keep it going.”  (Read)

What would a “culture of gratitude” look like in practice, and how would it be created and maintained?  A number of companies and commentators are showing the way.   Let’s take a look at some of the important lessons that have been learned to date about how appreciation can be such a positive and powerful force in a company’s culture.
Continue Reading Business Appreciation: Adding Gratitude to Company Culture in 2020