"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 business, which has always worked out. We even have equal titles — I am president, and he is chairman. My concern is 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, they have all asked that one of us be the majority owner of the business so decisions could be made if the two of us were to ever disagree.
"Frankly, I don't see that ever happening, and if it did, I would place family over 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 small businesses are first launched, fights between owners rarely occur. This is because there usually isn't much to fight about. As the business grows, however, the likelihood of disagreements between owners multiplies exponentially. This is because at that point there is something — usually something quite substantial — to fight over. The owners look at each other and say to themselves: "I am the reason this business is successful, and this other person is getting 50 percent of the profits. That's not fair!" And often, that attitude becomes fueled by family members who were not present or did not care much about the business when it was first formed — spouses, boyfriends, girlfriends, children or in-laws. Everyone thinks they know what's best for a business once it has proven itself, and these unsolicited consultants can wreak havoc on an organization that isn't broken and doesn't need fixing.
You are wise to place family first in a situation like this. Prospective investors should realize that a big part of the business' success is your ability to work well together. But they 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 won't move forward.
There are no easy solutions here, but there are a number of ways to get around this without having to flip a coin to decide who gets 51 percent and who gets 49 percent.
—If the two of you are directors of the corporation or limited liability company 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 that requires any dispute to be submitted for mediation by an acceptable third-party mediator. (When I do this, I usually include the name of a person and two alternates who are pre-approved by the co-owners. They could be your father, the company accountant or a mutual friend you both respect.)
—You and your brother could agree to add the investor as a third board member. The risk here, though, is that your investor is given a swing vote that could enable him or her to play you off against each other.
—You could enter into an agreement that would dissolve your company if the two of you disagree and can't resolve the dispute within a reasonable amount of time (like 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, 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 investor) to not be unreasonable.
Of course, your investor might not be comfortable with such a ticking-time-bomb provision in the company paperwork for fear of being left out in the cold. One way to ease concern is to add a provision that if the dissolution provision is ever invoked, the investor's ownership stake would be converted into debt, allowing him or her to get their investment money back before you and your brother get any of the proceeds.
Right now, the most important thing for the two of you is to continue communicating closely on all management decisions. In the words of country songwriter Keith Whitley, "We disagree but in the end, there will never be two closer friends. And brotherly love is something we all need."
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.