Multiple Owners, One Company: Don’t Let Internal Conflicts Wreck a Business Sale

Gary Papay and Tim Atwell
Managing Partners, IBG Business

Even in the best and simplest of scenarios, the sale of a successful mid-market business is a complex proposition. But when the business has multiple owners, their personal situations and priorities, their goals in selling, or whether the business should sell at all, can pose conflicts before the company goes on the market or, far worse, while a deal is pending.

This article, which features a conversation between two of our IBG Business colleagues, Gary Papay (Eastern/Mid-Atlantic) and Tim Atwell (Mountain States/Pacific Northwest), explores some of the conflicts that can threaten a successful sale and how co-owners might address them in the interests of getting on the same page.

Through our decades of experience and more than 1,200 successful deals, our IBG M&A advisors have learned at least one universal truth for co-owners: The earlier you anticipate your differences, agree on a process for resolving them, and communicate your objectives in selling the business, the greater the likelihood of a successful sale.

Starting on the Right Foot

Gary Papay: It’s always a challenge when you have more than one owner. When we meet with co-owners about the possible sale of their business, we try to uncover any areas of conflict right up front, to make sure everybody’s on the same page and in agreement on whether to sell. If they are, we ask all the owners to sign our engagement agreement, so that there’s written commitment across the board.

Tim Atwell: At that in-person meeting, we walk them through the process – the good, the bad, and the ugly – and by involving all of the owners, all parties feel they have all the facts, are participating, and have input in the company’s decisions.

Gary: That’s a good point. And by having all the owners there, we can focus on each one and learn, first-hand,  whether they’re all on board or maybe this one’s a little disgruntled.

I’m frequently amazed by how little communication goes on between owners in some companies. They might talk about business issues, but when it comes to what they want personally, they keep that to themselves. We had a situation recently where, at our first meeting with all of the stakeholders, one of the owners told us, “We all want to retire,” and right away one of the others contradicted him. “I don’t want to retire,” he said. “I’d like to stay here and reinvest some of my money back into the business and watch it grow.”

Tim: Getting started on the right foot is critical. We try our best to anticipate conflict, and if we cannot confirm that the stakeholders are in alignment to sell, we generally will not take on the engagement.

Gary: We always ask co-owners if they have a buy-sell agreement. These agreements often specify whether, for example, the majority rules or if one individual has the authority to speak and act for the group. If they don’t have a buy-sell, or if they have one but don’t agree on what it means, we’ll recommend that they meet with their attorney, or we will refer them to an M&A attorney, to get any conflicts ironed out in advance.

Tim: Gary, I’m glad you brought up the use of an attorney. We are not the only professional advisors involved in this process. Our clients’ other advisors – legal, tax, consulting – also help the owners navigate questions and concerns to ensure there is alignment.

Family Feuds

Gary Papay: In a family business, where the co-owners are siblings – some involved in the business, others not – how each perceives their rights, contributions, and obligations can raise major conflicts.

When I started out as an M&A advisor, one of the senior leaders in our firm told me, “I’m going to give you some advice. You’re going to run into a lot of family feuds. When you do, tell them this: ‘You can never split up the business, but you can always split up the money.’” It’s true and usually goes a long way toward solving family squabbles.

Then there’s the parent-and-kid situation. One example is where the child believes they are the heir apparent, but Mom and Dad say, “Hey, we want to cash out here, we want to retire. We don’t want to transfer ownership to you because, number one, you don’t have any money. Number two, for you to buy me out, I have to finance it, so I have to worry about how you’re going to run it.”

Eleventh-Hour Conflicts

Gary Papay: One issue that can come up late in the process is when the buyer asks the owners and even their family members to sign non-compete agreements. Even though Junior is not an owner, the buyer might require him to sign a non-compete because the buyer wants him to stay with the company and work for the buyer.

In one of our recent deals, Dad pushed back and said, “He’s not an owner, he shouldn’t have to sign a non-compete,” and the buyer said, “I’m not buying the business unless Junior signs one.” So, I had to have a talk with Dad and say, “Hey, for $25 million you’d better get Junior to sign – do something for him, like give him more of the proceeds.” In the end, Junior signed a non-compete and Dad put him in his own mechanical business after the sale, which was OK with the buyer.

Tim Atwell: Another issue is simply the strain of selling a business while you are still running it. It is a stressful and time-intensive process, especially in the due diligence phase. Sellers are, essentially, taking on a second full-time job.

Gary: A lot of times when there’s more than one owner, there’s one who works their tail off – or thinks they do – and another who comes in at 10:00 every day and goes home at 3:00.

Tim: Gary’s right – the contributions of each owner, to the business and to the sales process, may not be equal … and, even if they are, it may not feel that way to one or more parties. In most cases, we are able to delegate responsibilities and distribute the workload based on expertise and each owner’s role in the business, but it is human nature for people to feel like they are carrying more of the weight. It is not uncommon for resentment and frustration to set in during the process.

Another common late-stage issue is owner disagreement over price, or they might agree on the price but disagree on the terms. Individual owners can be drawn to certain aspects of an offer but object to others, and it usually depends on their personal situation and their objectives and goals post-sale. For some sellers, the amount of cash at close is item #1 on their list, while another might be focused on a second bite at the apple through an earnout or rollover equity.

The best way to avoid that is to provide owners with offers from multiple qualified parties. When you have conflicting owner objectives and only one offer, the buyer has all of the leverage. You may not be able to check every box for each owner, but having multiple candidates, and offers, increases the likelihood you can satisfy the ones at the top of the list for your clients.

Conflict Resolution

Tim Atwell: We often take on the role of mediator to work out owner differences. We make sure they understand the pros and cons of each issue that divides them, whether it is an aspect of the offer or some concern about the buyer. As we mentioned earlier, including their attorneys and their tax and accounting professionals in these conversations is always valuable.

Gary Papay: Another thing we might do is go to them and say, “OK, you’re not going to do this deal. Here’s what we’ve learned about your transaction from the buyers and from our decades of experience and 1,200 successful deals. If you want more money, better terms, here’s how to improve your business and make it more attractive.”

We try to leave them on a positive note, in the hopes that when they are truly ready to sell – maybe after they’ve worked out their conflicting issues – and improved their business, they’ll come back to us.

Tim: We lean on education, we lean on facts, and we lean on what the market is telling us. In our role, transparency is crucial, and we often need to tell our clients things that they do not want to hear. We have had clients prepared to walk away from offers, and valuations, that they will never see again. As Gary noted, others need to be told to press “pause” to improve the business before they can expect the type of offers they are seeking. It is our job to ensure they understand this and, even if they do not agree, can at least make informed decisions.

Gary: Sometimes we will suggest a radical solution that wasn’t an option while the first deal was pending. For example, “Why don’t you buy out your brother and sister, and then you can come to us when it’s just you and you’re ready to sell.”

Tim: That sounds radical, but it can be a real solution. We are currently working on a project where there was so much disagreement among the owners that they parked the sale, completed a buyout, and have come back to IBG with one owner fully committed to the sale. That’s not how we would have drawn it up, but it was the best solution for that particular ownership team.

Takeaway

Tim Atwell: If I had one unifying piece of advice for an owner group that is thinking of selling, it would be to strive for transparency and alignment. The sale of a multi-owner business will not achieve top dollar – if it occurs at all – without motivated and committed sellers, across the board. Selling a business is hard work, and the owners must want it, individually and collectively.