“We’ve been in business together for 23 years, and now I want to sell but he doesn’t have the money to buy my share, and he’s not ready to exit. What do I do?” I gave Marvin (not his real name) a simple but un-welcomed answer, “There’s little you can do, just wait.”
Of course, lawyers will point out the partnership agreement should have included a buy-sell agreement. But here’s the reality, many partners don’t have an agreement because the relationship evolved organically. Or maybe there is a partnership agreement, but there is no source of funding to activate the buy-sell. The other problem with a partnership agreement is less obvious but equally real: do you know how time-consuming, expensive, and emotionally traumatic it is to enforce an agreement? Who wants to go into litigation, or even the threat of litigation to handle a partnership dispute? I know, that’s what lawyers do, but let me tell you, litigation is good for no one (other than the lawyers). Litigation as an answer to a partnership dispute is a non-starter for most people.
Which brings us back to the question Marvin asked me. He wants to sell his 40% interest to his partner who owns 60%. Both guys are in their 60s, and their business is doing well, for now anyway. There’s no health or family crisis driving Marvin’s desire to sell, he told me he just wants to be relieved of the obligations and enjoy time with his wife, children and grandchildren. Side note to this story: one of Marvin’s daughters is married to a missionary in Japan and they have three children. Getting over there to spend quality time with those grandchildren is high, very high, on Marvin’s list of objectives. Running the business isn’t.
About halfway through the lunch with Marvin and his wealth planner, Marvin told me a more subtle objective driving his desire to sell. He said his partner is not willing to invest resources needed to meet some new competitive challenges. Marvin went on to say he is afraid his partner’s attention to this competitive threat will begin to affect the business’ results, and eventually the business’ market value. Marvin said, “My partner doesn’t see these challenges, but the way I see it, the longer we wait to sell, the less we’ll have to sell. So I just want out now.”
Marvin, his wealth planner and I discussed options for about 90 minutes, at which point we came to one painful conclusion. Marvin needs to give his partner an offer he can’t refuse, in other words, offer to sell his 40% at a below market value. I told Marvin the hard truth, if he really wants out now, he has to give his partner an incentive. As we worked the numbers on the back of the napkin, we estimated the company market value to be about $9 million, implying the market value of Marvin’s 40% should be $3.6 million.
But to incentivize his partner, Marvin will need to be willing to sell his 40% share for less than its market value.
Marvin will have to decide, with the counsel of his wealth planner, what his number is and then pitch that to his partner. Yes, it seems crazy and unfair for Marvin to have to take a haircut just because his partner is being difficult, but that brings me back to my core point, I hate partnerships! If you have your capital tied up in a business and can’t get that money back without the other party(ies) agreeing to it, you are in trouble. To quote Everett (George Clooney) from my favorite movie, O Brother Where Art Thou?, “Damn, we’re in a tight spot.”
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The names and fact patterns above have been changed to preserve the parties’ identities.
Tennessee Valley Group
Latest posts by Tennessee Valley Group (see all)
- That’s How We Do It In Our Industry - April 15, 2024
