By Cliff Ennico
“My brother and I formed a small business several years ago and it has done very well. We make enough to support ourselves and our families.
We have always been 50/50 owners of the small business, and it has always worked out well. We even have equal titles: I am President and he is Chairman. My concern is for the future. We have been approached by a couple of investors, and while nobody has come up with an offer we are willing to accept, all of them have asked that one of us be the majority owner of the business so that decisions can be made if the two of us ever disagree.
Frankly, I don’t see that ever happening, and if it did I would place family over my small business. But do you know any creative way we can make prospective investors happy on this point if and when the right offer comes along?”
First of all, congratulations on building a successful business with your brother without any friction – that is a very rare achievement in this day and age.
When a small business is first launched, fights between the owners rarely happen. This is because there is usually nothing much to fight about at that point.
As the business grows, however, the likelihood of disagreements between the owners multiplies exponentially because now there is something – usually a quite substantial something – to fight over. Each of the owners looks at the other and says to himself or herself “I am the reason this business is successful, and this other person is getting 50% of the profits. That’s not fair!” Often that attitude is fueled by family members who were not present, or did not care much about the business, when it was first formed – spouses, boyfriends or girlfriends, children, in-laws. Everyone thinks they know what’s best for a business once it’s proven itself, and these unsolicited “consultants” can wreak havoc with an organization that isn’t broken and doesn’t need fixing.
You are wise to place family first in a situation like this – your prospective investors should realize a big part of the business’ success is your ability to work well together. But your investors are also wise to be cautious about a 50/50 ownership structure. If you and your brother ever disagree, there’s a risk the business will be “deadlocked” and cannot move forward.
There are no easy solutions here, but there are a number of ways to get around this you should consider, without having to “flip a coin” to decide who gets the 51% and who the 49% of this business. For example:
- If the two of you are directors of the corporation or limited liability company (LLC) that runs the business, one of you could be given an extra vote “solely for the purpose of breaking any tie in a board vote”;
- You and your brother could sign a “mediation agreement” requiring any dispute between the two of you to be submitted to mediation by an acceptable third-party mediator (when I do these, I usually include the name of a person, and two alternates, who are “pre-approved” by the two of you – for example, your father, the company’s accountant, or a mutual friend the two of you both respect);
- You and your brother could agree to add the investor as a third board member – the risk here, though, is that gives your investor a “swing vote” that would enable him to play each of you off against the other; or
- You could enter into an agreement dissolving your company if the two of you disagree and can’t resolve the dispute within a reasonable time (for example, 90 days).
I personally prefer the last choice, because it puts real pressure on both of you to resolve any disputes without the involvement of third parties. Neither of you will be willing to “kill the goose that’s laying the golden eggs” supporting your families, and you will be more willing to compromise to keep the company alive. Also, this approach guarantees that both of you will be nagged to death by your spouses (if not your investors) not to be unreasonable.
Of course, your investors may not be comfortable with such a “ticking time bomb” provision in the company paperwork because they are afraid they will be left out in the cold. One way to ease their concerns is to add a provision that if the “dissolution” provision is ever invoked the investor’s ownership stake would be converted into debt, allowing them to get their investment money back before you and your brother get any of the proceeds.
The most important thing for the two of you right now is to continue communicating closely on all management decisions the way you always have. In the words of country/western songwriter Keith Whitley, “we disagree but in the end but there will never be two closer friends, and brotherly love is something we all need.”
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller’s Tax and Legal Answer Book and 15 other books. Follow him at @cliffennico.