We determined to tackle the not so romantic topic of the Ex Factor. And no, we’re not referring to reality TV, but rather something we encounter surprisingly often when helping founders sell their businesses: ex-partners. These can be former romantic or business partners who still retain shares, undertake work, or draw an income from the company. Given that many founders we work with at Morphose have been at the helm for 20+ years, it’s not uncommon to be dealing with more than one ex.
So a little bit of advice is anticipate this potential roadblock, review your shareholder agreement and any side agreements that may have been reached along the way to determine if they need to be renewed or revisited in the context of a business sale. Updating a Shareholder Agreement that’s been in place for many years is a tricky task so make sure you have the right advice and support and not just a lawyer who will produce the right document. The last thing you want is to drag a new buyer down a bumpy memory lane if you don’t have to.
Some further practical measures you might want to consider to help mitigate against "the Ex Factor" getting in the way of a sale:-
If a former partner is still drawing a salary, remember that they have the legal rights of long-term employees. If they are not active members of the team a buyer will likely want to see either a redundancy settlement or a formal resignation letter. If neither can be secured, the next step would be to explore an indemnity agreement—but this typically happens during the sale process, which can slow things down and may not be accepted. Moreover, it involves you taking on potential liabilities that could arise further down the line.
Familiarise yourself with your shareholder agreements, particularly Drag Along and Tag Along Rights, to understand what rights a former partner or disgruntled shareholder may have in the event of a sale.
Tag Along Rights protect minority shareholders by ensuring they receive the same deal as majority shareholders in a sale. This prevents controlling shareholders from securing a better outcome for themselves at the expense of minority shareholders.
Drag Along Rights prevent minority shareholders from blocking a deal by requiring them to accept the agreed terms and sell their shares if a specified majority (often set at between 66%-90%) agrees to a sale. This ensures smoother transactions and protects consensus.
In this context, it’s also important that you’re familiar with your current cap table, which over time might have changed due to funding rounds and share dilutions. This is so you can identify which shareholders are likely to support your motions so consensus can be achieved. It also goes without saying that your “Books and Records” should be up to date and accurate – we often see extra legal costs being incurred to reconstitute books that have been mislaid or not accurately kept.
While shareholder agreements may be long, detailed, and arguably tedious, their essence is to protect all shareholders and define the course of action in the event of a shareholder dispute. These documents mostly sit in the background during times of harmony but come to the forefront in moments of discord.
Selling a business is complex enough without adding the Ex Factor. If you can get ahead of potential pitfalls—by reviewing shareholder agreements, confirming employment settlements, and ensuring your business is structured for a smooth exit—you’ll be in a much stronger position to proceed.
If your business doesn’t have a Shareholder Agreement in place already we strongly recommend you put one in place regardless of whether the shareholders are on good terms – it’s much better and easier to get one signed up under those circumstances than if disharmony has broken out and much cheaper to resolve issues without the need to involve formal legal processes. Consider it a form of a “prenup”!!
At Morphose, we have deep experience working with owner-managed businesses, guiding them through every step of a sale with expert advice and hands-on support. All our partners have successfully sold businesses of their own, so we understand not just the technical process but also the deeply personal nature of such a journey. Beyond the deal itself, we’ve helped resolve complex ‘Ex Factors’—unresolved matters from the past—to ensure the best outcome for our clients. Do reach out to us if you could do with some advise on resolving the Ex Factor.
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