• Power Trip: How to Resolve Power Abuse in a 50/50 Business Partnership
  • June 19, 2015
  • Law Firm: Lerch Early Brewer Chartered - Bethesda Office
  • Lerch Early Legal Update

    What can you as a business owner do to protect your business or maximize its value if you lack the voting power to control the business? Entrepreneurs enter into 50/50 ownership situations, or worse, for a variety of reasons and with the best of intentions. Over time, one owner may prove to be more energetic, visionary, and successful, but may lack decision-making power on issues like fair pay or taking risks to grow the business. Disagreements on these and other fundamental issues can put in danger the very existence of a now successful business.

    The first step for you as an owner is to assess your leverage. Do customers or employees owe their loyalty and respect mostly to you or to the other owner? Are you free of non-compete obligations if you decide to pursue an orderly end to your own involvement? Does the business owe you more money? Do you personally own intellectual property that the business needs to carry on? Positive answers to these and other questions may give you more power than you realize to negotiate a solution. Even if the answers are negative, understanding each party’s leverage will help frame your approach for the ensuing negotiations.

    Setting Expectations and Agreements Early Can Avoid a Date in Court

    Most times, the best option is for co-owners to work together to create a long-term solution for control of the business. A mutually agreed upon resolution offers predictability and structure—for you, your customers, and your employees. A fight in court almost never does, even though it sometimes may be the only way to solve the conflict. Guidance from qualified independent counsel for each of the owners is essential for the parties to know their leverage and to explore, document, and implement more constructive solutions.

    A sale of the business to a third-party, or a buy out of one owner by the other, are common and effective solutions if the parties can work out issues of valuation and security. Here are a few other paths that can be explored as part of an overall agreement protecting owners from possible abuses by the other:
    • Splitting control of the business assets among the owners in a way that lets each owner effectively control a geographic area or a business division. The business may remain as one consolidated unit with different management of each division, or it can be totally split into separate entities with each party owning one of the entities.
    • Activating a board of directors whereby a neutral third-party board member gains a level of general knowledge and wisdom about the business, and is available to build consensus between co-owners or to break ties when they cannot agree. These arrangements can have a “sunset” provision so that co-owners have a set period of time to create a permanent solution to their issues while the third-party director protects continued operations in the interim.
    • Allowing one owner to have or earn a temporary means of breaking ties, such as giving the key operational owner a time-limited or one-time right to do so, or implementing a points-based system under which each owner accrues points over time and can spend them to break ties over specific issues.
    Tackling control issues is a challenge, but as you continue to invest your time and energy into your business, you may find that resolving them in advance is as important to your own financial security as it is to the success of the business.