Thinking About Selling Your Business to Your Business Partner? (please read this first)

{This blog was originally published in January 2013, but this lesson can never be taught enough. Too often I see the negative results when business owners do not take this advice}

They met in the mid-80s while in business school at Vanderbilt. They were assigned to the same study group, so it didn’t take long for them to realize they had complimentary skill sets. Bob (not his real name) was analytical, loved data, and never met a detail he couldn’t retain. Steve (not his real name) had a more intuitive feel, maybe it was a holdover from his days in advertising before business school.

After getting their MBAs, the two friends went separate professional ways, though both stayed in Nashville. Bob took at position with a major accounting firm and Steve entered the marketing department of a locally-based national retailer. They continued to hang out together on weekends, especially during football season since both were big SEC fans.

While attending a Vandy-South Carolina game, the two friends started talking about their jobs and it was quickly obvious neither particularly liked corporate life. As a take charge kind of guy, it didn’t take Steve long to start looking for something the two friends could do together. After meeting a well-connected business broker in Nashville, Steve found a business the two friends could buy together. It was perfect setup, the owner was retiring, he was willing to carry some of the financing, and the SBA was in a particularly aggressive mood, so the two friends didn’t have to mortgage their homes to get started.

The first few years were rough, neither partner took a salary, but fortunately Bob’s wife was a schoolteacher, and Steve had recently gotten married to a lady who had just made a partner in a local CPA firm. After about three years of struggles, the business began to turn a profit and the two friends settled into a stable growth plan that allowed them to increase their salaries while continuing to grow the business.

Over the years, the business had challenges, ups and downs, as did the partners. Steve’s wife had a scare with breast cancer, which she fortunately got through. Bob’s second son was born with a mild case of autism, but the family adjusted and they soon settled into a reasonably normal lifestyle.

As the business grew, the two friends roles in the business became further refined, Bob handled all back-office and operational functions, Steve managed the sales and marketing efforts. Over the years the business became a ubiquitous presence in Nashville.

The two friends had decided when they reached their 50th birthday they’d each take a four-week sabbatical. Steve was three years younger than Bob, so Bob was the first one to get his four weeks off. He and his two sons traveled to Europe for a bike trip through southern Italy. Three years later for his 50th birthday sabbatical, Steve and his wife rented a house in the Florida beach community of Seaside. While walking on the beach with his wife, Steve decided he wanted to retire from the business and devote the next 20 years of his professional life to his church’s emerging missionary work in Honduras. He assumed Bob would be open to this idea the only question being how much Bob would pay for Steve’s 50% interest in the company.

A few days after Steve returned from his sabbatical, he and Bob went to lunch at their favorite meat-and-three. Steve told Bob he’d like to retire at some point during the coming year. Though he would never admit it, Bob was somewhat relieved because in the past couple of years he had detected Steve was working less and ready for a change. Sadly though, the two friends had never taken time to document their exit plan, much less work out if/how the partnership would be dissolved. Their conversation at lunch was the first time they had ever discussed how they would separate.

Steve had done some research on business valuations and estimated his share of the business was worth $8 million. He figured that would be a sufficient amount for him to retire early and devote his remaining productive years to missionary work. Bob almost coughed up his mashed potatoes when Steve put that number on the table, there was no way he could fund an $8 million partner buyout. He did some quick analysis, and based on the cash flow of the business, Bob calculated he could afford to pay Steve $2.9 million over 20 years, roughly $145,000 per year.

So after almost 20 years of working together, helping each other at every step, being in each other’s weddings, completely relying on each other, it didn’t take more than two minutes for the two friends to enter a completely different zone, that weird place when you suddenly distrust the motive of your partner. Steve just wanted his fair share of the business’ value and Bob wanted to keep the company’s cash flow stable so as to not risk what they had built over the past 20 years.

That’s when I got called. Bob’s wife was a Nashville native, and she had been longtime friends with a lady, Cindy (not her real name), who at that time was president of a local civic club. I had just joined this civic club and while at a new member reception, I met Cindy and told her I was a business broker and mediator specializing in business transfers. She told me she had a friend whose husband was going through a difficult time with his partner, and she thought I might be able to help them. A few days later I get a call from Bob who told me he’d gotten my name from Cindy, and he asked if we could meet.

We met for coffee at a local Panera and Bob gave me a complete background on the friends’ relationship, the growth of the business, and the awkward state they were now in as they tried to construct a fair plan of dissolution. Of course, fair is in the eye of the beholder, which is why I get called into situations like this. Bob thought he was being fair and that Steve was pushing too hard for an overly aggressive buyout. In fact, it was kind of awkward when Bob said he believed Steve was trying to use his missionary work as leverage to push for an overly aggressive valuation. I told Bob I could help them but only if the two partners each wanted me in the loop. We parted after about 90 minutes of discussion, I told Bob to call me if I could further help.

Over the course of the next six months, as the two friends talked they realized two things were beginning to happen, first they seldom talked about the business anymore, they sort of put that on auto-pilot, which was beginning to affect business results and second, they realized their conversations were getting more and more awkward, each beginning to question the motives of the other. The 20-year relationship was on the verge of collapse, and both parties retained legal counsel to help them sort through their options, should it come to that.

Though I had had no contact with Bob since that meeting at Panera several months earlier, he had apparently remembered that I talked about mediation as a way business partners could resolve dissolution issues. Bob mentioned the idea to Steve who was open to it (Steve hated the idea of this going to lawyers), so they readily agreed to split my fee in hopes I could help them resolve their valuation differences.

Over the course of six meetings (two with each individual and two with both in the room) we resolved a valuation and a structured payment method that allowed Steve to proceed with his missionary initiatives, while assuring that Bob had the working capital to continue to grow the business.

Mediation is the ideal way to resolve disputes about business valuation or business transfer. Had the parties gone to court, there would have been one winner and one loser, the wonderful 20-year relationship borne over late night studying in business school would have surely blown up, and the business would have further suffered from the partners’ inattention.

Today, Bob continues to run the company, and though growth has slowed coming through the recession of ’08-09, the business continues to generate strong cash flow. Steve has pulled back a bit from his missionary initiatives in Honduras to help his daughter on the launch of her import distribution business. Bob and Steve don’t see each other that often, but when they do they laugh about the good old days on West End in Nashville, and some of those crazy football game road trips they enjoyed. Bob has begun to think about retiring, and he’s asked me to help him think through a strategy should he decide to put the business on the market.

All’s well that ends well, but I often wonder what would have happened had I not met Cindy at that reception. Would the partners have ended up in a dissolution lawsuit? Would a 20-year friendship been torn asunder? Would all the warm memories of days gone by been blown up by allegations of unfairness and greed? I’m glad we’ll never have to know the answers to those questions.

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone
The following two tabs change content below.

Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

Latest posts by Tennessee Valley Group (see all)