Is Your Business at Risk of a Costly Deadlock?

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In the early days of a business venture, equal ownership—where profits, losses, and decision-making power are split 50/50 between two partners—often seems fair and straightforward. But when two partners or evenly divided groups of owners hit a roadblock on major decisions, the business can grind to a halt. This “deadlock” can cripple growth, erode profits, and even threaten the company’s survival. Protecting your business against deadlock isn’t just prudent; it’s essential for longevity. Here’s how to safeguard your business, with real-world examples highlighting just how serious these risks can be.

Five Steps to Managing and Avoiding Owner Deadlock

1. Create Strong, Deadlock-Resistant Governing Documents

A retail business co-owned by two partners hit a deadlock over whether to expand operations to a second location. Without a mechanism in their LLC operating agreement to break the tie, they spent months in dispute, missing out on prime real estate and valuable market opportunities. This delay in decision-making cost the business significantly, and tensions between the owners heightened as the expansion stalled.

An experienced business attorney can help you build safeguards into your foundational documents, such as shareholder agreements, bylaws, or LLC operating agreements. Clauses specifying dispute-resolution mechanisms, options for adjusted equity distributions, or provisions to add an independent board member as a tiebreaker can be invaluable in saving a company from these costly standstills.

2. Acknowledge Deadlock Early

In a software development company, two co-owners with equal shares disagreed on a major product pivot. Rather than addressing it directly, each owner continued to make unilateral decisions on different aspects of the product, leading to a confusing brand message and declining team morale. The project eventually suffered as employees found themselves pulled in conflicting directions, unsure of the company’s vision.

Recognizing and addressing deadlock head-on could have prevented the damage caused by lack of coordination. By acknowledging deadlock early, owners can avoid the risks of escalation and misalignment, keeping the company on course while working toward a resolution.

3. Adopt a Collaborative Approach to Resolution

In one family-owned business, two siblings with equal ownership found themselves at an impasse over hiring a new CEO. Their shareholders’ agreement didn’t include a deadlock resolution clause, so they opted to bring in a mediator to help bridge their differences. Through mediation, they were able to work through their varying perspectives and eventually select a candidate both could support.

If governing documents don’t provide guidance for deadlock, options like mediation, arbitration, or even appointing a temporary executive can help owners find common ground. A collaborative approach emphasizes commitment to the company’s future and helps sustain a positive working relationship, protecting the business’s long-term stability.

4. Be Prepared if Litigation Becomes Necessary

In another instance, two co-owners of a fast-growing tech startup faced a deadlock when one partner wanted aggressive expansion while the other preferred conservative growth. When informal negotiations and mediation failed, they turned to litigation. During this time, the court appointed a receiver to manage day-to-day operations and keep the business functional while ownership issues were resolved.

Litigation can be expensive and time-consuming, but in certain situations, it may be the only way to resolve deep-seated disagreements. A court-appointed receiver can play an essential role by ensuring continuity, managing operations, and protecting revenue streams during disputes, allowing owners to focus on finding a permanent resolution without risking the business’s performance.

5. Recognize That Dissolution Could Be the Outcome

In a real estate investment firm, two owners hit an impasse when one advocated diversifying into commercial properties, while the other wanted to continue focusing on residential developments. With no way to resolve their differing visions and no clause in place to break the tie, they ultimately agreed to dissolve the partnership. This allowed each owner to pursue their preferred path, but it also ended the business they’d built together.

While dissolution is often a last resort, it’s a way to move forward when all else fails. A formal dissolution lets both parties exit with their assets, maintaining their individual visions without compromising the company’s performance or reputation.

Consult with The Frazer Firm

Owner deadlock is a real risk with potentially severe consequences for your business. To protect your company from deadlock or to navigate an existing impasse, consult with an experienced business attorney. Contact The Frazer Firm today to leverage our experience and start building a resilient, dispute-resistant company, ensuring your business’s security and future growth.