Buying a Business With a Partner — What Happens If You Later Disagree?
Acquiring a business with a partner is an exciting prospect. It spreads financial risk, combines different skill sets, and makes the undertaking more manageable. What buyers often focus on during the acquisition process is the target business itself — its financials, its contracts, its operations. What they sometimes underinvest in is the governance structure between the co-buyers, which determines how the business is run and what happens when they disagree.
The Acquisition Is Also the Formation of a Business Relationship
When two or more people buy a business together, they are simultaneously entering into a business relationship with each other. The documents that govern that relationship — the LLC operating agreement, the shareholder agreement, or the partnership agreement — are at least as important as the purchase agreement itself. They establish who has authority to make decisions, how disagreements are resolved, what happens if one partner wants to exit, and how the financial benefits of the business are shared.
These documents are easiest to negotiate before the acquisition closes, when the parties are aligned and motivated to get the deal done. After closing, when the operational realities of running the business together set in, the same negotiation becomes much harder.
Decision-Making Authority
One of the first governance questions is who makes which decisions. In a fifty-fifty partnership, the default is that major decisions require both parties to agree — which creates deadlock risk. Structuring decision-making authority clearly, identifying which decisions require unanimous consent and which can be made by a managing member or majority vote, can prevent the most common operational disputes.
Buy-Sell and Exit Provisions
The governing documents for a co-owned business acquisition should address what happens if the partners later want to part ways. A buy-sell provision establishes the mechanism for one partner to buy out the other — including how the buyout price is determined and on what terms it is paid. Without this, a partner who wants to exit may have limited options, and one who wants to stay may find themselves involuntarily in business with an heir, an ex-spouse, or a bankruptcy trustee.
Restrictive Covenants Between Co-Owners
When partners acquire a business together, it is also worth considering what restrictions apply if one of them later exits. A partner who leaves the business — whether voluntarily or involuntarily — and then starts a competing venture, solicits the business’s clients, or hires away its employees can cause significant harm. Restrictive covenant provisions between co-owners, addressed in the governing documents at the time of acquisition, are easier to negotiate and more likely to be enforceable than ones added after a dispute begins.
When Disagreements Do Arise
Even with well-drafted governing documents, co-owners of a business sometimes reach an impasse. The quality of the governing documents determines whether that impasse resolves through a structured process or through litigation. Business owners in New Jersey and New York who are considering acquiring a business with a partner should consult with a business attorney to structure the deal and the governing relationship in a way that protects their interests on both sides of the transaction. For more, see our pages on buying a business and operating agreements.
Business owners in New Jersey and New York considering acquiring a business with a partner are welcome to schedule a consultation with Russo Law LLC to structure the deal and the governing relationship.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This corporate lawyer blog post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey. It may not reflect laws in other jurisdictions.
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