By Jeffrey D. Jones, ASA, CBA, CBI
Owning and managing a business can be a real challenge. Dealing with partners or shareholders creates a whole set of additional challenges that can be beneficial or detrimental depending upon the structure of the partnership, the relationship of the partners, and the documentation specifying operational procedures, management responsibilities, and buy/sell provisions. Part One of this series discussed the benefits of having partners. This article will review some of the negative aspects of having partners.
TRIALS AND TRIBULATIONS
As a sole owner, you have total control over business operations. Giving up a portion of this control to others can sometimes be traumatic. Change is always difficult. The benefits have to be very lucrative for people to want to change. I have had many discussions with business owners regarding acquisition of their business and/or offering a merger or partnership arrangement. Initially, I often get a positive response when we talk about the benefits we could obtain together; however, having to give up some degree of control over business operations and to accept some limitation on fees and profit splits often overrides the perceived benefits. While short sighted, the fear of change and the unknown often causes the death of a lot of deals.
When all partners in a firm have an equal ownership interest, company benefits are usually equal and disputes over business operations can usually be resolved quickly. However, having both majority and minority partners in a firm can create some unique challenges. Minority partners often want the same benefits as the majority partners. Disputes can arise over salaries, company paid benefits, and company paid operating expenses such as advertising, clerical support, and lead distribution. Majority partners tend to think of the company’s profitability and future growth, whereas minority partners tend to be more interested in their personal benefits first.
As a business broker and business appraiser, I have had the unique opportunity to see many businesses with partners or shareholders. Partnership problems are a common reason for a business to be for sale. Many of the business appraisals that I do are utilized in conjunction with litigation involving partnership/shareholder disputes. The problems include an unclear understanding as to management responsibilities, disagreement regarding operational procedures, and unmet personal expectations.
Jeff Jones is President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. located at 10500 Northwest Freeway, Suite 200, Houston, TX 77092. You can contact him by phone at
713-401-9110 or by email at jdj@advancedbb.com.
