Partnerships and Selling Your Company
BY Inc. staff
The legal options for a minority owner. Plus, how to prepare your company for sale.
QI own 49 percent of my company, and I think my partner, who owns the rest, has managed it irresponsibly, even failing to pay bills. I want to force my partner into a buyout. What are my options?
Name Withheld Ohio
Is your partner a felon? Or just a bad manager? Because if your partner has displayed behavior that is simply irresponsible, as opposed to downright criminal, ousting him or her by force will require a lengthy and expensive legal battle. The laws governing limited partnerships and LLCs are pretty similar in most states, says Thomas A. Aldrich, a Cleveland-based partner at law firm Thompson Hine. And under those laws--including Ohio's, says Aldrich--it's generally pretty difficult for a minority owner to force out a majority partner. As a result, few partnership disputes actually end in lawsuits.
Still itching for a fight? OK, fine. There are a few ways to build a case against your slacker co-owner. Think back to those innocent days when the two of you embarked hand in hand on your grand adventure. Did you sign a partnership agreement? Assuming your lawyer was worth his or her salt, the agreement should have spelled out the specific duties you both would perform, how you would divvy up profits, and how you could conceivably kick your delinquent partner to the curb. It doesn't even have to be a formal document--in some cases, it could be a set of e-mails in which you and your partner agreed to certain terms. If your partner is violating the terms of the agreement, you may have grounds for a lawsuit. You may also have a case if your rights as a minority owner are being squelched--if, for example, you're not receiving your fair share of the profits.
But don't say we didn't warn you. These lawsuits usually cost at least $50,000, Aldrich says, and sometimes much more. Talk, by comparison, is cheap. Ed Kopf, co-founder of Arlington, Virginia-based BMC Associates, which does mediation and succession planning, has worked with dozens of embittered business partners. He says his first job is restoring civility between the partners. "Business partners are like married couples," says Kopf. "They learn what each other's pain points are and keep pressing them." Mediation could help you reconcile. Or it could help you come up with a fair buyout agreement. The entire process will probably run you $5,000 to $25,000, a price that should ensure your slice of the pie is still worth grabbing.
QI am the sole owner of a safety consulting company with no employees. In the next 18 months, I would like to sell my business and retire. How can I build up its value in preparation for a sale?
Harry Zoellick Zoellick Safety Consulting Services Rockford, Illionois
Last January, Inc. columnist Norm Brodsky pondered how selling his business would affect his sense of self. "The company becomes a part of your identity," he wrote. "You start to wonder, Is the business me, or am I my own person?" As a company of one, you are asking the opposite question: What is the business without me? Most of your company's value is in your relationships with clients and the knowledge you have gained from experience. To attract buyers, you have to prove it won't be painful for them to rip that knowledge out of you.
Most business owners should begin preparing for a sale three to five years in advance, according to David Dinsmore, founder of Certified Business Appraisal in Morrow, Ohio--so you had better get moving. Any manuals you've written or materials you've created are a great starting point for conjuring black-and-white assets out of the gray matter in your head. Compiling, organizing, and updating all of that data should be your first priority, says Roger Winsby, the president and co-founder of Axiom Valuation Solutions, which specializes in business appraisal.
Speaking of documentation, have you looked at your books lately? Make sure you have clear records of sales and profits over the past five years, says Ross Sklar, who has sold three companies and is now CEO of SEI Chemical in Los Angeles. Also, Sklar adds, you're probably recording certain expenses on your corporate income statement that a new buyer may not incur (your home office, for example). These are called carrybacks, and you should discuss them with your buyer and create a separate income statement that shows what your profits would be without them.
Then take a look at your client list--this is probably the most attractive feature to suitors, especially if Romeo is a competitor who's been eyeing your customers ever since they signed on with you. Love is a fickle beast; just because your customers have been good to you doesn't mean they'll be friendly to a new face. Use all the charm they fell for in the first place to get them to sign longer-term contracts with a stipulation for ownership substitution. These contracts will bolster your buyer's confidence that your customers won't jump ship after the sale.
For more information on selling a business, check out the small-business planner at www.sba.gov and the Closing a Business Checklist at irs.gov.