Buying a Business With a Partner: Avoid the partner calamity

Buying a Business With a Partner?

Here’s How to Avoid “Partner Calamity”

22 September 2025: Buying a Business With a Partner

When buying a business with a partner or two, one of the most important—and often overlooked—steps is creating a shareholders’ or members’ agreement. This document sets the framework for how the company will be run, what rights each owner has, how decisions are made, and what happens when disputes or transitions occur.

While enthusiasm and shared vision are strong foundations for a business, they are not substitutes for structure and clarity. Disagreements between owners, if not pre-emptively managed, can cause delays, financial loss, or even business collapse. A well-drafted shareholders’ or members’ agreement avoids this by setting the rules early.

In this article, we discuss the seven critical aspects every shareholders’ or members’ agreement must address to protect the interests of the business as well as the interests of each of its owners.

1. Voting Rights

Why it matters:
In a company with more than one owner, voting rights determine how power is distributed. Without a clearly defined voting structure, critical decisions can be delayed, dominated by one party, or contested in a way that harms the company.

What should be covered:

Share classes and voting weight: Do all shareholders have equal voting rights? Are there different classes of shares (e.g., common vs. preferred) with different voting power?
Decision-making thresholds: What requires a simple majority (over 50%) versus a supermajority (e.g., 66% or 75%)? For example, hiring/firing directors, changing bylaws, or selling the company often require higher thresholds.
Reserved matters: Some decisions might require unanimous agreement. Examples include issuing new shares, changing the business model, or merging with another entity.
Deadlock resolution: If a 50/50 vote results in a deadlock, what’s the tie-breaker? Will there be a outside party casting a vote, mediator, or automatic buy-sell trigger?

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Why buyers/investors care:
When additional capital is required for expansion nor when the time comes to sell – and it will – a predictable governance structure reduces the risk of internal conflict and ensures that important decisions can be made efficiently.

2. Roles, Responsibilities, and Contributions

Why it matters:
Clarity around what each shareholder contributes—whether it’s cash, time, expertise, or assets—sets expectations and reduces misunderstandings. This is especially important in startups and founder-led businesses where roles often evolve over time.

What should be covered:

Initial contributions: What is each owner contributing (capital, IP, client list, etc.)? Is it documented and verified?
Ongoing responsibilities: Are certain owners expected to work in the business day-to-day? If so, what are their duties?
Time commitment: Will working owners be full-time or part-time? Is there a minimum requirement?
Compensation: Will owner-employees be paid salaries, or are profits the only reward?
Accountability and performance: Are there KPIs (Key Performance Indicators), performance reviews, or consequences for under-performance?

Why it matters legally and practically:
Disputes often arise when one owner feels others aren’t pulling their weight. Documenting expectations helps avoid this and provides a basis for action if issues arise.

3. Dispute Resolution

Why it matters:
Even in well-functioning companies, disagreements are inevitable. A good shareholders’ or members’ agreement will include procedures to resolve disputes privately, quickly, and fairly—without dragging the company through the courts.

What should be covered:

Internal dispute procedures: Should owners attempt informal resolution or mediation first?
Mediation and arbitration: Will disputes be escalated to a third-party mediator or arbitrator? If so, who chooses them and how is the cost split?
Jurisdiction: In what legal jurisdiction will disputes be settled?
Deadlock mechanisms: For equal ownership structures, what happens if the owners are at a standstill? Common solutions include:
- Buy-sell clauses: Either party can offer to buy the other out at a set price.
- Russian roulette clause: One party names a price, and the other must either accept it or buy at that price.
- Texas shootout: Both parties submit sealed bids, and the higher bid wins.

Why this matters long-term:
Having a clear path to resolve disputes minimizes disruption to the business and reassures investors, lenders, and partners that conflicts won’t derail operation.

4. Profit Distribution

Why it matters:
Owners and investors invest in a business with an expectation of seeing a return on their investment; time, capital or assets invested. But without an agreed-upon method for distributing profits, disputes and dissatisfaction are almost sure to arise.

What should be covered:

Dividend policy: Will profits be distributed regularly (monthly, quarterly, annually), or reinvested in the business?
Distribution formula: Will profits be split according to percentage of ownership? Are there any special arrangements, like preferred returns?
Capital reserves: Will the company hold back a percentage of profits for working capital or future investment?
Board discretion: Can directors delay or refuse dividend payouts in the interest of long-term growth?

Special cases:

If one shareholder works full-time and another is a passive investor, will the working shareholder receive a salary in addition to profit share?
Are any shareholder loans involved, and how will those be repaid before profits are distributed?

Why it’s critical:
Misunderstandings around money can destroy partnerships – and businesses. A transparent, consistent system for distributing profits protects relationships and keeps everyone aligned which helps the business grow.

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5. Non-Compete Clauses

Why it matters:
You don’t want a shareholder walking away and setting up a competing business using your customers, suppliers, or confidential information. Non-compete clauses are designed to protect the company’s interests.

What should be covered:

Non-compete: Prohibits shareholders from working with or starting a competing business during and after their involvement with the company.
Non-solicitation: Prevents departing owners from poaching employees, clients, or suppliers.
Non-disclosure/confidentiality: Protects the company’s proprietary information, trade secrets, financial data, and intellectual property.
Duration and geography: For enforceability, non-compete clauses must be reasonable in time (usually 6–24 months) and geographic scope (varies, but we’ve seen – and used – 25 miles).

Balance is key:
Too restrictive, and the clause may be unenforceable. Too lenient, and the company is exposed. The agreement should strike a reasonable balance based on the industry and nature of the business.

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6. Succession Planning

Why it matters:
Businesses need a plan for when a shareholder dies, becomes incapacitated, retires, simply wants out or otherwise exits unexpectedly. Without it, the company can fall into uncertainty, legal disputes, or unwanted ownership transitions.

What should be covered:

Death or incapacity: Will shares transfer to the deceased’s estate or be bought back by the company or remaining shareholders?
Buy-sell arrangements: Often triggered by death, divorce, bankruptcy, or disability. These clauses outline:
- Who can/must buy the shares
- How the price is calculated
- How the purchase will be funded
Insurance policies: Many businesses take out life insurance on key shareholders to fund buybacks in the event of death or disability.
Right of first refusal: Prevents shares from being transferred to outsiders without giving current shareholders a chance to buy them first.

Why this builds stability:
Succession planning ensures that a shareholder’s departure—planned or unplanned—doesn’t destabilize the business or burden surviving owners.

7. Exit Strategy and Share Transfer Rules

Why it matters:
Every shareholder will eventually leave the business. A strong agreement should outline how and when this can happen, and under what conditions.

What should be covered:

Voluntary exit: Can a shareholder sell their shares freely? Is board or shareholder approval needed?
Right of first refusal (ROFR): Before selling to an external party, the exiting shareholder must offer their shares to existing shareholders.
Tag-along rights: If majority shareholders sell their shares, minority shareholders can “tag along” and sell their shares on the same terms.
Drag-along rights: If a majority shareholder wants to sell the company, they can force minority shareholders to join in the sale to streamline the transaction.
Exit valuation: How will shares be valued upon sale or transfer? Will it be based on EBITDA multiples, a third-party valuation, or a formula of some kind?
IPO or acquisition: If there’s a long-term goal to take the company public or sell to a larger firm, the agreement should outline how the process will work and how proceeds will be distributed.

Why investors and founders care:
A transparent exit strategy gives all parties clarity on how they can realize value from their shares, and it makes the business more attractive to outside investors or acquirers.

The Bottom Line

A shareholders’ agreement isn’t just a formality—it’s a critical governance document that shapes how your company operates, grows, and resolves challenges.

By thoughtfully addressing these seven key areas, you provide clarity, reduce risk, and create a roadmap for your company’s future.

Don’t wait for a problem to draft a shareholders’ or members’ agreement. The best time to create one is at the start of the relationship, when everyone is optimistic, open and generally in a good mood. Don’t buy a business with a partner without this.

“I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite.“

– G.K. Chesterton

If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.

Joe

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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at jo*@*******************og.com

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Buying a Business With a Partner