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Avoiding Problems With Your Partners


As any company grows, the needs and desires of the owners can change. With a publicly traded company, it is easy to sell or buy more shares if a shareholder wishes. If the company is private and closely held, it becomes a more difficult proposition to keep all shareholders aligned. In any enterprise involving people, there are many issues that can develop and evolve over time. Small issues, if not discussed openly and dealt with, can needlessly turn into major disputes. What sorts of issues can arise? Here are some examples, which are all somewhat related:

  • Different financial needs. One partner may want (or need) to pull as much cash as possible out of the business, while another may want to reinvest as much cash as possible into the business to grow the company.
  • Differing perspectives on lifestyle. Somewhat related to the above, one partner may want to work a 40-hour week and is happy with the company as in its current state. He or she has no interest in putting in the effort and time to drive the company to the next level, while the other owner(s) are putting in 60-hour weeks to move things forward.
  • Differing desires and goals for a liquidity event. There are really only two opportunities for what is known as a liquidity event: Either you continue to harvest cash, with the shareholders pulling out as much cash as they can (hopefully without crippling the company), or the company is prepared for an eventual sale to a third party (whether a financial or strategic buyer, or to the public via an IPO). If the desires of the shareholders are not congruent on this matter, there can be real conflict.

Over time, these differences can morph into significant issues between shareholders. It’s important to note that there is no right or wrong answer to these issues. For example, there is absolutely nothing wrong with selling a company to a third party, and it is also perfectly fine to retain current ownership and generate as much annual cash flow from operations to the owners as possible. And yet, there can be significant conflict between shareholders around these matters.

Given the impact to the company, there are ways owners can minimize the probability of this occurring:

  • Frank and open communication on a regular basis. The best way to ensure that everyone is on the same page, or keeping all relevant parties apprised if it appears that there is a problem, is regular communication. This can be informal meetings, conversations in the office, or whatever venue suits the parties who are involved. The key thing is to communicate; it’s in everyone’s best, long-term interest to do so.
  • Well thought out shareholder agreements. If your shareholder agreement has been appropriately drafted, it will go a long way toward detailing how shareholder disagreements can be resolved, should they arise. This might include mandating regular shareholder meetings, dispute mediation and other resolution mechanisms (such as buyout provisions). This can be extremely helpful if feelings run deep on the matter at hand, and can provide useful, objective tools for dealing with the situation.
  • An outside board of directors, or at least a board of advisers. An outside board of directors or board of advisers will be able to provide valuable, objective perspective on the issues that the company is facing. It is certainly possible for people of good will to have very different opinions about the direction the company should take – grow, stay where it is, acquire another company or get bought out. An outside group of experienced businesspeople such as a board of directors can be invaluable in assisting management to come to a decision about which way the company should go. They can provide objective insight on matters where owners may be having difficulty coming to agreement.

Almost without exception, all stakeholders are better off if the owners of the company can identify a set of common interests and goals, and stay on the same page. Taking the time to put in mechanisms that improve communications between shareholders and resolve differences can pay big dividends in the future.

Source: The 1/29/10 Rector Factor author Bruce Rector

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