Solving Deadlocks: Don't Hold Your Business Hostage
May 24, 2017
If you are planning to go into business with a partner or partners, it is important to have a well thought out operating agreement in place before you start the business. This agreement is like a prenuptial agreement for business partners and by working with an experienced attorney, each partner can determine what happens if the business runs into future issues. It is preferable to get this type of agreement in place before starting business operations, because, oftentimes, logic flies out the window during a crisis and emotional impulses can cause short-mindedness. Additionally, if not considered proactively, if a death, bankruptcy, or some other major event occurs, it could be too late to make certain changes.
One of the many considerations that should be discussed with your attorney is what happens if a disagreement comes up and there is a “deadlock” about how to move forward with the business. The idea being that even if the partners want to split, it doesn’t always make sense to end a successful business, entirely. Procedures calling for neutral mediators, arbitration, and agreed upon formulas, are certainly options available for discussion in crafting an operating agreement. However, this post looks at some of the more creative ways business partners can go about proactively planning for such an issue.
- Texas Shoot-Out: Each partner provides a neutral third party an envelope that contains that partner’s all cash bid detailing how much they are willing to buy out the other partner(s). The bids are then opened together and whoever offers the most money will buy the other partner(s) out at that price.
- Dutch Auction: A modified Texas Shoot-Out where the partners still give sealed bids to a neutral third party indicating the minimum amount they would sell their share for. The partner with the highest written value then gets to buy out the other partner(s) at the price indicated in the losing partner(s) bid.
- Russian Roulette: A partner provides the other partner(s) with a written offer with an all-cash price for the partner’s share. The partner receiving the offer then has the option to (1) buy the first moving partner out, or (2) sell to the first moving partner at the written price.
These provisions are rather dire because they force partners to take a hard-handed approach to handling key business issue discrepancies so the business is not held hostage. Many factors, including the relative worth of the business and a partner’s ability to pay, for example, may influence whether any partner would even want to use such a provision. Partners may consider taking a multi-step approach to internal dispute resolution that leaves provisions like the ones discussed above as a last resort. Ultimately, having these types of conversations prior to starting a business should help partners communicate in hopes of building a stronger business.
If you are interested in starting a business, or are currently in business and have a legal issue, reach out to our office for solutions. Call us at 847-346-5565 or visit on the web at Law-CF.com
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