The best business advice, opinion, news and expertise in Greater Manchester and further afield.

Friday, 29 May 2009

Friday Guest Blog: Breaking up isn't so hard to do

Rob Richardson
Associate Director at Grant Thornton, Manchester

Of all the truths about shareholder disputes perhaps the most telling is simply this: business divorce is on the rise.

As money tightens, companies are at the very least having to work harder to achieve the same result. In this climate, it’s just human nature for business partners to look at each other and wonder if the person they started out with is still up for the fight?

Sometimes it’s about strategy. Very often it’s about people not pulling their weight. Whatever the cause of a serious dispute, the outcome may well boil down to someone making a permanent exit.

Disputes can arise at just about any time in the life of a business. Even if you keep the management and investment structure mean and lean – perhaps just you and your original partner – there is always the chance that at some stage a radical difference over the direction of the company will emerge.

Difficulties are often exacerbated by the growing pains encountered by most businesses. As partners grapple with setbacks in the marketplace or serious cashflow problems, relationships are often put under severe strain.

Bringing in private equity investors can also be a crunch point as you are suddenly working with people who not only have a significant economic stake in your business, but also their own clear ideas about how it should be run. Indeed, being ousted by new investors probably ranks high on the list of founders’ nightmares.

Needless to say, a united boardroom with all the people who own the business pulling in broadly the same direction is one of the prerequisites for success. So if it becomes clear that someone either wants to or needs to leave the business, then the process of finding a settlement without recourse to potentially damaging litigation has to begin in earnest.

I think people are discouraged from seeking a settlement because the issues tend to be sensitive and complex by nature, but there is always a way out. Ultimately, the value of the business has to be protected and this common interest can drive a cost effective and speedy resolution.

Sometimes partners will have mechanisms outlining how someone can leave. In many cases, however, there’s nothing in place at all. People start out full of confidence in their business partner and it seems counter-intuitive to focus on an exit strategy when faced by so many other challenges and priorities. The trouble with that approach is that you have nothing to fall back on when the dynamics of your situation change – which they probably will.

Either way, even if you have an exit strategy there are going to sharp disagreements over cash. In a recent case I worked on the settlement figure was 500 per cent higher than the opening offer. That wasn’t particularly unusual. The figure could have gone even higher but realism should always be part of the process: whatever figure the parties agree, the business has to be able to fund the deal without being excessively hindered moving forward.

One of the jobs for professional advisers is to take the emotion out of the situation. That’s about telling people what really matters. I’ve seen this most often in family businesses where they argue, bicker or become locked in a battle of wills about slights and perceived slights.

In these cases people need a reality check: the only issue that really matters is the performance of the business and its future prosperity.

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