Selling a Business When the Partners Disagree
What to do when one owner wants to sell and the other does not, how the operating agreement decides it, and how to keep the business worth selling.
Words by
Matan Michael
One partner is tired, or sick of the other, or wants the money for a reason that has nothing to do with the business. The other partner likes the work and sees no reason to stop. Both are owners, both have given years to the company, and each believes the other is being unreasonable. We see this more often than owners expect, and the sale rarely moves until the disagreement is dealt with first.
Start with what the paper says
Before the two of you argue about whether to sell, find out who is entitled to decide. The operating agreement, shareholders agreement or partnership agreement usually has the answer, and it may differ from what either of you remembers. Some agreements require a unanimous vote to sell the whole company. Some allow a majority to approve a sale and force the minority to go along, which is called a drag-along. Some give the minority a matching right, called a tag-along, so that a smaller owner can join a sale on the same terms. Some say nothing useful at all.
Read the sections on transfer of interests, buy-sell rights and deadlock. A buy-sell clause may let one partner name a price and let the other choose to buy or sell at that price. A right of first refusal may require one partner to offer the shares to the other before going outside. Look for any valuation formula, any restriction on who can be a buyer, and any notice periods. If the document is old, check whether it was ever amended, and whether the amendments are signed.
Rules on what a partner can force vary by state and by the type of entity, and your attorney confirms what applies. Each partner should have their own attorney read the agreement, since the two of you may have different interests now. A single lawyer advising both is how a disagreement turns into a lawsuit.
Why a buyer cares about the disagreement
A buyer wants clean title. Anyone who buys a business wants to know that the people signing the agreement have the authority to bind the company and that no one else can later claim the sale was not authorized. Two owners at odds are a red flag on its own, even if the paper technically allows a sale to go ahead. A buyer who senses that one partner is unwilling will wonder whether that partner will cooperate on diligence, sign the closing documents, honor a non-compete or keep working through the transition.
There is a quieter cost. Buyers rely on the owners to answer questions, and when two owners give different answers the buyer concludes that the records are not trustworthy. Partners who argue in front of a buyer, even politely, lose price. Our post on due diligence describes how many requests flow to the owners in a typical sale, and it will show you how much cooperation is needed from both of you.
Employees, customers and vendors pick up on a split quickly. If a manager hears that one partner is pushing to sell and the other is pushing back, the manager starts looking at other jobs. Confidentiality is harder to keep when the owners are not aligned.
Find out what each partner wants
Disagreements about selling are seldom about selling alone. One partner may want out of the daily work and does not know how else to say it. One may be worried about what the sale would mean for family members who work in the business. One may think the price is too low, which is a different argument from whether to sell. One may feel the other has not carried a fair share and wants the sale to settle that. A partner who has lent the company money, or personally guaranteed the lease, has an interest in how and when the sale happens that the other partner may not have thought about.
Have the conversation away from the office and without staff nearby. An outside advisor or a mediator can help here because they are not part of the history. We can say what a buyer would pay and what a sale would net each of you, and numbers often shift positions. A partner who says they would never sell for less than a certain amount may change their view when they see what the business is likely to fetch. A partner who is reluctant often wants an assurance, such as a role after the sale, a share in the later payments, or the freedom to buy the other out.
Do not underestimate how much a valuation helps. A neutral number leaves the argument open and moves the two of you from feelings to a range. The post on how much your business is worth explains how that range is built.
Options short of a sale to an outside buyer
If one partner wants out and the other wants to stay, the simplest solution is often a buyout of one by the other. The partner who stays may need financing, and the partner who leaves may need to accept payments over time. Seller financing between partners works much like any other, and the seller financing post covers the terms. The price in a partner buyout is its own argument. Minority discounts, which lower the value of a share that cannot control the company, and control premiums, which raise the value of a share that can, both come up. The agreement may fix the method. If it does not, expect to need an appraiser both sides trust.
A second option is a staged exit. The leaving partner sells part of their interest now and the rest over a few years, stepping down from operations along the way. This works best when the business can afford the payments and the stay-at-home partner can manage without the leaver. It does not work if the two are no longer able to be in the same room.
A third option is bringing in an outside investor or a new partner, who buys the departing owner's share and joins the continuing partner. Some buyers do exactly that. They purchase a portion of a business and let the existing operator continue. Our post on who buys small businesses lists the types, and a few of them are comfortable with partial deals.
If none of these work, a full sale to an outside buyer is still available, and may be the cleanest outcome. It requires both signatures and a plan for who handles each piece of the process.
When the agreement forces the issue
Suppose the agreement gives one partner the right to compel a sale. Using it might be legal, and it might also destroy the business that the sale is supposed to monetize. A partner forced into a sale does not help with diligence, may talk to employees, and may refuse to stay on afterward. Buyers sense this, and the best ones walk away. In most deals we see, the right to compel is a last resort and works better as a basis for negotiation than as an action.
Deadlock provisions sometimes offer mediation or arbitration before anything else. These can be slow and expensive, and the business suffers while they run. A negotiated outcome, even a disappointing one, generally nets more than a forced process where both sides spend on lawyers. We cannot advise on the legal strategy. Your attorney does that, and it is worth hiring one who has handled partner disputes before.
If the dispute has already reached a lawyer's letter, expect a delay before any buyer can be approached. Most buyers will not proceed while there is a threatened claim between the owners, and a lender will not either.
Keep the business worth selling while you work it out
A dispute between owners takes attention away from customers, and customers feel it. Revenue slips, key employees leave, and the price that both of you were arguing about falls. Agree on interim rules even if nothing else is settled. Who signs checks, who talks to the bank, who approves hires, who speaks to staff about the future. Put the rules in writing and have both sign. Maintain the books to the same standard as before and avoid taking out money in ways the other partner would see as unfair.
Keep the conversation off social media and out of the lobby. Pay particular attention to the people who matter most to a buyer, such as the manager who runs the floor, the bookkeeper and the top salesperson. They need to hear something steady and consistent from both of you.
What to do this week
Get the governing documents out and have each side read them with their own attorney. Order a valuation so the conversation has a number in it. Write down, privately, what you would accept in a sale, what you would accept in a buyout, and what you would refuse. Then ask your partner to do the same and meet for an hour with no staff nearby. If the two lists overlap anywhere, you have a deal to build, and we can help you find who will pay for it.
